The determination of bank interest rate margins: Is there a role for macroprudential policy?

E. Philip Davis (), Dilruba Karim () and Dennison Noel ()
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E. Philip Davis: Brunel University
Dilruba Karim: Brunel University
Dennison Noel: Brunel University

Journal of Banking Regulation, 2025, vol. 26, issue 3, No 8, 433-463

Abstract: Abstract The advent of macroprudential policy alongside monetary policy raises the issue whether macroprudential policy has an additional effect on bank interest rate margins to that of monetary policy, and if so, whether it accentuates or offsets the interest rate effect. In light of this, we estimate combined effects of macroprudential policies and monetary policies on bank interest margins for up to 3723 banks from 35 advanced countries over 1990–2018. In the short run, tightening of both types of policy tends to narrow the margin, while in the long run, monetary policy typically widens the margin while effects of macroprudential policies are mostly zero or positive, suggestive of countervailing action by banks. There are also significant interactions between macroprudential and monetary policy for several macroprudential policies; a tighter monetary stance is widely found to offset the negative effect of macroprudential policies on margins while a loose monetary policy leaves the negative effects intact, with potential consequences for financial stability. These results are of considerable relevance to policymakers, regulators and bank managers, not least when monetary policies are tight to reduce inflationary pressures.

Keywords: Macroprudential policy; Monetary policy; Short-term interest rate; Yield curve; Bank interest margin (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G21 G28 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41261-025-00271-4

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