Impact of base rate cuts on bank profitability

Adam Banai, Zsuzsanna Hosszú (), Gyöngyi Körmendi () and Bence Mérõ ()
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Zsuzsanna Hosszú: Magyar Nemzeti Bank (Central Bank of Hungary)
Gyöngyi Körmendi: Magyar Nemzeti Bank (Central Bank of Hungary)
Bence Mérõ: Magyar Nemzeti Bank (Central Bank of Hungary)

MNB Bulletin (discontinued), 2014, vol. 9, issue 2, 18-22

Abstract: The adequate long-term earnings potential of the financial intermediary system is essential from the perspective of financial stability. Therefore, the impact of economic developments, e.g. monetary policy, on the profitability of the banking system is an important issue. Central bank interest rate cuts affect the profitability of the Hungarian banking sector through numerous channels. In our study, we provide an overview of the impact mechanisms relevant to the relationship between the central bank base rate and banks’ profitability. We then proceed to quantify the impact of an interest rate reduction of 100 basis points on the profitability of the banking sector. According to our findings, the profitability effect over a two-year horizon amounts to HUF –26.9 billion (in other words, the average annual difference is HUF –13.4 billion) which, while not negligible, does not influence the monetary policy transmission materially. Since our calculations depend on the initial status of the macroeconomic environment, our results should not be applied automatically at any interest rate level.

Keywords: low interest rate environment; profitability of banking sector (search for similar items in EconPapers)
JEL-codes: E47 G21 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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