Simple banking: profitability and the yield curve
Piergiorgio Alessandri and
Benjamin Nelson ()
No 452, Bank of England working papers from Bank of England
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.
JEL-codes: E40 G21 (search for similar items in EconPapers)
Pages: 55 pages
New Economics Papers: this item is included in nep-ban and nep-mac
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Journal Article: Simple Banking: Profitability and the Yield Curve (2015)
Working Paper: Simple banking: profitability and the yield curve (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0452
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