Working Paper: CEPR ID: DP13980
Authors: Michael Brei; Claudio Borio; Leonardo Gambacorta
Abstract: This paper investigates how the prolonged period of low interest rates affects bank intermediation activity. We use data for 113 large international banks headquartered in 14 major advanced economies during the period 1994–2015. We find that low interest rates induce banks to shift their activities from interest-generating to fee-related and trading activities. This rebalancing is stronger for low capitalised banks. Banks also moderately adjust their funding structure, away from short-term market funding towards deposits. We observe a concomitant decline in the risk-weighted asset ratio and a reduction in loan-loss provisions, which is consistent with signs of evergreening.
Keywords: Monetary Policy; Bank Business Models; Financial Crisis
JEL Codes: C53; E43; E52; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low interest rates (E43) | bank intermediation activities (G21) |
| low interest rates (E43) | shift from interest-generating to fee-related and trading activities (G24) |
| low interest rates (E43) | adjustment in funding structures (F32) |
| low interest rates (E43) | decline in risk-weighted asset ratio (G32) |
| low interest rates (E43) | reduction in loan-loss provisions (G21) |