This paper investigates how monetary policy affects bank profitability. We use data for 109 large international banks headquartered in 14 major advanced economies for the period 1995–2012. Overall, we find a positive relationship between the level of short-term rates and the slope of the yield curve (the ‘interest rate structure’, for short), on the one hand, and bank profitability – return on assets – on the other. This suggests that the positive impact of the interest rate structure on net interest income dominates the negative one on loan loss provisions and on non-interest income. We also find that the effect is stronger when the interest rate level is lower and the slope less steep, that is, when non-linearities are present. All this suggests that, over time, unusually low interest rates and an unusually flat term structure erode bank profitability.
CITATION STYLE
Cruz-García, P. (2020). The Impact of Monetary Policy on Bank Profitability (pp. 105–135). https://doi.org/10.1007/978-3-030-45752-5_6
Mendeley helps you to discover research relevant for your work.