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Bank Profitability and Risk-Taking in a Low Interest Rate Environment: The Case of Thailand

Lathaporn Ratanavararak and Nasha Ananchotikul
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Lathaporn Ratanavararak: Bank of Thailand
Nasha Ananchotikul: Bank of Thailand

PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: This paper studies the effects of monetary policy on the bank profitability and risk-taking. Using banklevel and account-level data sets of Thai banks during the period 2004-2017, we find that lower interest rates tend to reduce profitability. The effect works mainly through the impact of the interest rates on bank net interest income. At the bank level we find limited evidence of increased riskiness in the overall balance sheet of Thai banks when interest rates are low. However, the account-level results from a duration analysis suggest that low rates may lead to higher loan default risk and lower loan quality for long-term loans, particularly those in the portfolio of small and medium banks. Small firms seem to be more affected by bank risk-taking behavior. We also find that when the interest rate remains low for a protracted period, this tends to further increase bank risk-taking in new loans, though it helps lower the default risk for existing loans. The findings overall point to the potential unintended consequences of a low-for-long monetary policy accommodation with implications on financial stability.

Keywords: Bank profitability; Bank risk-taking; Low interest rates; Monetary policy; Thailand (search for similar items in EconPapers)
JEL-codes: E43 E52 G21 (search for similar items in EconPapers)
Date: 2018-07, Revised 2018-07
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