Analysis of the Relationship between Negative Interest Rate and Bank Profitability (in Korean)

Jae-Joon Han () and Inhwan So
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Jae-Joon Han: Division of Global Finance and Banking, College of Business Administration, Inha University

Economic Analysis (Quarterly), 2018, vol. 24, issue 2, 55-89

Abstract: This paper analyzes the impact of negative policy interest rate (NPIR) on bank profitability. In particular, we analyze the impact on its profitability after adding the gap cost to the Monti-Klein(1971)’s bank profit function reflecting the change in interest rates in the inter-bank market, the deposit market, and the loan market, which are important paths in monetary policy transmission. As a result of the theoretical model analysis, bank profitability improves when the inter-bank market interest rate is negative (-) due to the negative policy interest rate (NPIR) and all the interest rates fall. However, this is in conflict with the conventional belief that banks' profitability will deteriorate due to the NPIR. To resolve the contradiction, we also set up a case where the deposit interest rate is downwardly rigid. It is then found that the overall profitability of the banks may deteriorate as the deterioration of the profitability of the deposit portion dominates. It also appears that this phenomenon is intensified as the number of competing banks increases, or as the size of the gap increases. Finally, if the profitability of the bank deteriorates due to both downward rigidity of the deposit rate and the limitation on the expansion of loan amount, we suggest that negative interest rate policy(NIRP) should be conducted only in exceptional circumstance.

Keywords: Negative Policy Interest Rate (NPIR); Banking industry; Competition; Profitability; Downward rigidity (search for similar items in EconPapers)
JEL-codes: G21 L13 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:bok:journl:v:24:y:2018:i:2:p:55-89

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