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The influence of monetary policy on bank profitability

Claudio Borio (), Leonardo Gambacorta () and Boris Hofmann ()

No 514, BIS Working Papers from Bank for International Settlements

Abstract: This paper investigates how monetary policy affects bank profitability. We use data for 109 large international banks headquartered in 14 major advanced economies for the period 1995-2012. Overall, we find a positive relationship between the level of short-term rates and the slope of the yield curve (the "interest rate structure", for short), on the one hand, and bank profitability - return on assets - on the other. This suggests that the positive impact of the interest rate structure on net interest income dominates the negative one on loan loss provisions and on non-interest income. We also find that the effect is stronger when the interest rate level is lower and the slope less steep, ie that non-linearities are present. All this suggests that, over time, unusually low interest rates and an unusually flat term structure erode bank profitability.

Keywords: monetary policy; bank profitability; financial crisis (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
Date: 2015-10
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Related works:
Journal Article: The influence of monetary policy on bank profitability (2017) Downloads
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