Low Interest Rates and Bank’s Profitability – Update May 2019
My last post on this important topic was in 2017. Since then several new articles and research papers have been published. I have compiled them in this post. Please see references.
In my posts I have shown how many trends in economics for the last thirty years can be explained by unintendend consequences of US Federal Researve monetary policy of lowering interest rates to boost economic growth.
- Rise of Shadow Banking – MMMF
- Rise of International capital flows in USA
- Growth of Consumer credit – Credit Cards and Housing Loans
- Decline in Net Interest Margins of the Banks
- Risk taking by banks to maintain and increase their profits
- Rise of Non interest income of Banks
- Rise of Non core business of banks
- Rise of Mergers/Acquisitions/Consolidation in Banking sector
Related to these are:
- Business Investments by Production side of economy
- Increase in Market concentration of Products
- Increase in Mergers and Acquisitions/consolidation among Product market businesses
- Decreasing monitory policy effectiveness
- Wrong economic growth forecasts
- Secular Stagnation Hypothesis
- Rise of Outsourcing and global value chains
- Free Trade agreements
- Increase in Ineqality of wealth and Income
- Increase in corporate profits and equities market
- Increase in corporate savings
- Increase in share buybacks, and dividends payouts
I have yet to see an effort by economists and policy makers to analyze these trends in an integrated manner.
To be prepared for any future crisis in economic/financial system, collective efforts have to be made to understand non linear sources of complexity and fragility.
My related posts:
Impact of Low Interest Rates on Bank’s Profitability
Non Interest Income of Banks: Diversification and Consolidation
Low Interest Rates and Risk taking channel of Monetary Policy
Economics of Broker-Dealer Banks
Low Interest Rates and International Capital Flows
Low Interest Rates and Banks Profitability: Update – December 2016
Business Investments and Low Interest Rates
Low Interest Rates and Banks’ Profitability : Update July 2017
and this one,
Increasing Market Concentration in USA: Update April 2019
Key Sources of Research:
Monetary policy and bank profitability in a low interest rate environment
Click to access ecb-wp2105.en.pdf
The “Reversal Interest Rate”: An Effective Lower Bound on Monetary Policy∗
Markus K. Brunnermeier and Yann Koby
This version: May 3, 2017
Click to access 16f_reversalrate.pdf
Click to access 26d_rir_bankofcanada.pdf
Interest Rate and Its Effect on Bank’s Profitability
Bank performance under negative interest rates
VOXEU
https://voxeu.org/article/bank-performance-under-negative-interest-rates
How low interest rates impact bank
BBVA
https://www.bbva.com/en/how-low-interest-rates-impact-bank-profitability/
Negative-nominal-interest-rates-and-banking
Money and Banking
https://www.moneyandbanking.com/commentary/2018/10/21/negative-nominal-interest-rates-and-banking
Monetary policy and bank equity values in a time of low interest rates
Miguel Ampudia, Skander Van den Heuvel
Click to access ecb.wp2199.en.pdf
Bank Profitability and Financial Stability
Prepared by TengTeng Xu, Kun Hu, and Udaibir S. Das1
IMF
January 2019
https://www.imf.org/~/media/Files/Publications/WP/2019/wp1905.ashx
The Unintended Consequences Of Central Bank Policies & Negative Interest Rates
Forbes
Financial stability implications of a prolonged period of low interest rates
Report submitted by a Working Group established by the Committee on the Global Financial System
The Group was co-chaired by Ulrich Bindseil (European Central Bank) and Steven B Kamin (Board of Governors of the Federal Reserve System)
July 2018
Monetary policy and bank profitability in a low interest rate environment
https://academic.oup.com/economicpolicy/article/33/96/531/5124289
Determinants of bank profitability in emerging markets
by E. Kohlscheen, A. Murcia and J. Contreras
Monetary and Economic Department
January 2018
BIS
The Risk-Taking Channel of Monetary Policy Transmission in the Euro Area
Matthias Neuenkirch, Matthias Nöckel
4/2018
Click to access cesifo1_wp6982.pdf
ADAPTING LENDING POLICIES WHEN NEGATIVE INTEREST RATES HIT BANKS’ PROFITS
Óscar Arce, Miguel García-Posada, Sergio Mayordomo and Steven Ongena
2018
Banks, Money and the Zero Lower Bound
Michael Kumhof
Xuan Wang
Banking in a Steady State of Low Growth and Interest Rates
by Qianying Chen, Mitsuru Katagiri, and Jay Surti
IMF
https://www.imf.org/~/media/Files/Publications/WP/2018/wp18192.ashx
Changes in Monetary Policy and Banks’ Net Interest Margins: A Comparison across Four Tightening Episodes
Jared Berry, Felicia Ionescu, Robert Kurtzman, and Rebecca Zarutskie
Federal Reserve
2019
Monetary Policy and Bank Profitability, 1870 – 2015
47 Pages Posted: 8 Feb 2019
Date Written: January 25, 2019
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3322331
The effect of falling interest rates and yield curve to banks’ interest margin and profitability: cross-country evidence from the EU banks in the aftermath of 2008 financial crisis
Giorgi Chagoshvili
MS Thesis
Bank Performance under Negative Interest Rates
by Jose A. Lopez, Andrew K. Rose, and Mark M. Spiegel
Determinants of bank’s interest margin in the aftermath of the crisis: the effect of interest rates and the yield curve slope
https://link.springer.com/article/10.1007/s00181-017-1360-0
Key Determinants of Net Interest Margin of Banks in the EU and the US
MS Thesis
Charles University
Bc. Petr Hanzlík
https://dspace.cuni.cz/bitstream/handle/20.500.11956/99546/120297262.pdf?sequence=1