Prolonged Low Interest Rates and Banking Stability

Kosuke Aoki, Ko Munakata and Nao Sudo
Additional contact information
Kosuke Aoki: Professor, University of Tokyo (E-mail: kaoki@e.u-tokyo.ac.jp)
Ko Munakata: Associate Director, Research and Statistics Department, Bank of Japan (E-mail: kou.munakata@boj.or.jp)

No 19-E-21, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: Banks in developed countries share a common concern that prolonged low nominal interest rates may pose a threat to their business, as the level of nominal interest rates is often positively correlated with bank profits in the data. It is not well understood, however, how low nominal interest rates impact bank profits and what they imply for banking stability. To address these issues, this study theoretically explores how the level of nominal interest rates affects bank profits and banking stability in the long run by extending a model of bank runs constructed by Gertler and Kiyotaki (American Economic Review, 2015). The model, calibrated to Japan and other developed countries, makes three predictions: (1) low interest rates do indeed reduce bank profits by compressing the deposit spread; (2) due to the presence of the effective lower bound of the policy rate and a slow recovery of bank net worth after a run, low interest rates bring the economy closer to a state where a bank run equilibrium can exist; (3) although there are quantitative differences across countries, a decline in nominal interest rates does not necessarily bring the economy to a state with a bank run equilibrium on its own, except for in severe cases where the TFP growth rate or the target inflation rate falls below zero.

Keywords: Prolonged low interest rates; Bank profits; Banking stability (search for similar items in EconPapers)
JEL-codes: E20 J11 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.imes.boj.or.jp/research/papers/english/19-E-21.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:19-e-21

Access Statistics for this paper

More papers in IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Kinken ().