A decade of low interest rates: impact on Swiss bank profitability

Terhi Jokipii and Jayson Danton

No 2024-10, Working Papers from Swiss National Bank

Abstract: We analyse the impact of interest rates on Swiss banks' profitability. Our assessment is based on annual data on individual bank balance sheets and income statements in a standard panel regression setting for a sample of domestically focused commercial banks. We find that net interest rate margins (NIM) and return on assets (ROA) exhibit different sensitivities to market interest rate levels and highlight the non-linear effect of compressed liability margins on NIM. In addition, we show that initial bank characteristics affect the link between falling interest rates and profitability. However, bank characteristics that amplify/alleviate NIM pressure from falling interest rates differ from those that affect ROA pressure. Furthermore, banks have taken measures to safeguard profitability: (i) with respect to risk-taking, all banks increased their exposure to rising interest rates by increasing their asset durations. Moreover, banks that started with lower mortgage ratios increased these ratios considerably, particularly during the second half of the sample period (2015-2019); and (ii) Some banks actively worked to curb deposit growth when other sources of funding became relatively cheaper. Overall, these adjustments have helped alleviate the downward pressure of falling interest rates on bank profitability.

Keywords: Bank profitability; Net interest margin; Low interest rates; Liability margin (search for similar items in EconPapers)
JEL-codes: E43 E52 G21 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2024
New Economics Papers: this item is included in nep-ban and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2024-10

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