Working Paper: CEPR ID: DP13752
Authors: Charles A. Goodhart; Ali Kabiri
Abstract: There is a debate about the effect of the extremely low, or even negative, interest rate regime on bank profitability. On the one hand it raises demand and thereby adds to bank profits, while on the other hand it lowers net interest margins, especially at the Zero Lower Bound. In this paper we review whether the prior paper by Altavilla, Boucinha and Peydro (2018) on this question for the Eurozone can be generalized to other monetary blocs, i.e. USA and UK. While our findings have some similarity with their earlier work, we are more concerned about the possible negative effects of this regime, not only on bank profitability but also on bank credit extension more widely.
Keywords: bank profitability; low interest rates; net interest margin; credit extension
JEL Codes: E52; G18; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy easing (E52) | Bank profitability (G21) |
| Decrease in short-term interest rates (E43) | Bank profitability (G21) |
| Flattening of the yield curve (E43) | Bank profitability (G21) |
| Low interest rates for an extended period (E43) | Negative consequences for bank profitability (G21) |
| Impact on loan loss provisions (F65) | Offset effects on net interest income (E43) |
| Weak economic conjuncture (E66) | Sluggish growth of bank loans (G21) |