Simple banking: profitability and the yield curve

Piergiorgio Alessandri and Benjamin Nelson

No 945, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

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 non negligible loan pricing frictions.

Keywords: banking profitability; net interest margin; interest rates (search for similar items in EconPapers)
JEL-codes: E4 G21 (search for similar items in EconPapers)
Date: 2014-01
New Economics Papers: this item is included in nep-ban and nep-mac
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Simple Banking: Profitability and the Yield Curve (2015)
Working Paper: Simple banking: profitability and the yield curve (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_945_14

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