Simple Banking: Profitability and the Yield Curve

Piergiorgio Alessandri and Benjamin Nelson

Journal of Money, Credit and Banking, 2015, vol. 47, issue 1, 143-175

Abstract: How does bank profitability vary with interest rates? We present a model of a monopolistically competitive bank subject to repricing frictions and test the model's predictions using a unique panel data set on UK banks. We find evidence that large banks retain a residual exposure to interest rates, even after accounting for hedging activity operating through the trading book. In the long run, both level and slope of the yield curve contribute positively to profitability. In the short run, however, increases in market rates compress interest margins, consistent with the presence of nonnegligible loan pricing frictions.

Date: 2015
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Citations: View citations in EconPapers (124)

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https://doi.org/10.1111/jmcb.12172

Related works:
Working Paper: Simple banking: profitability and the yield curve (2014)
Working Paper: Simple banking: profitability and the yield curve (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:47:y:2015:i:1:p:143-175

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