Interest Rates and Net Interest Margins: The Impact of Monetary Policy

Paula Cruz-García, Juan Fernández de Guevara () and Joaquin Maudos ()
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Juan Fernández de Guevara: University of Valencia
Authors registered in the RePEc Author Service: Juan Fernández-de-Guevara ()

Chapter Chapter 2 in The Business of Banking, 2017, pp 5-33 from Palgrave Macmillan

Abstract: Abstract In this chapter, we examine the determinants of bank net interest margin, focusing on the effect of interest rates, and thus monetary policy decisions. The analysis is carried with a panel of banks from 32 OECD countries over the period 2003–2014. The results show a quadratic relationship between net interest margins and interest rates, implying that the variation of the latter has a greater effect when interest rates are low. An important policy implication of the results is that there is a trade-off between economic growth and financial stability associated with the impact of expansionary monetary policy when the level of interest rates is very low. As a result, if the current scenario of low and even negative interest rates persists for much longer in certain countries (such as in the Eurozone), it will have a negative effect on bank profitability and consequently on financial stability.

Keywords: Interest Rate; Bank Profitability; Expansionary Monetary Policy; Intermediation Margin; Bank Risk Aversion (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:pal:pmschp:978-3-319-54894-4_2

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DOI: 10.1007/978-3-319-54894-4_2

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