“Low-For-Long” interest rates and banks’ interest margins and profitability: Cross-country evidence

Abstract

Interest rates in many advanced economies have been low for almost a decade now and are often expected to remain so. This creates challenges for banks. Using a sample of 3,385 banks from 47 countries from 2005 to 2013, we find that a one percentage point interest rate drop implies an 8 basis points lower net interest margin, with this effect greater (20 basis points) at low rates. Low rates also adversely affect bank profitability, but with more variation. And for each additional year of "low for long", margins and profitability fall by another 9 and 6 basis points, respectively.

Bank profitability and macroeconomic conditions: Are business models different?

“…Therefore, we have no a priori on the sign of the effect of GDP given the set of other macroeconomic controls in the regression. Similar results are found by Claessens et al (). Furthermore, during the sample period banks were involved in a structural effort to diversify revenues, which could create a spurious correlation in the data.…”

“…In countries facing the sovereign debt crisis, banks were hit harder after 2011, as their economies deteriorated, whereas losses peaked in 2008 in countries where banks were more exposed to the subprime crisis and to toxic assets. In recent years, the low‐interest rate environment has been compressing net interest margins, but the empirical relationship between overall profitability and the level of nominal interest rates is not statistically robust once growth is included in the regressions (Claessens, Coleman, & Donnelly, ; ESRB, ; Genay & Podjasek, ). In countries where the recession was particularly severe, banks are still paying a high cost of risk in terms of provisioning, and profitability remains weak though improving (European Banking Authority, ).…”

Cyclical Properties of Bank Margins: Small versus Large Banks

“…5 Most of these studies, however, use aggregate country-level data or conduct cross-country comparisons, e.g., Albertazzi and Gambacorta (2009) and Borio et al (2017). In particular, Claessens et al (2017) document low levels of net interest margins in the current low nominal rate environment in a cross section of banks from forty-seven countries. In the US data, Covas et al (2015) demonstrate the di¤erence in the level of NIM between small and large banks in the last twenty years, as well as the widening of this spread since 2010.…”

Macroeconomic Analysis of Interest Rate and Economic Growth in Nigeria: A Time Series Approach

“…Using a sample of 3385 banks from 47 countries spanning 2005 to 2013, Claessens, Coleman and Donnelly (2018) establish that low interest rates have a significantly greater impact on the bank net interest margin than high interest rate [19]. In addition, the impact is greater on interest income margins than on interest expense margins, and banks with short maturity balance sheets are more affected than those with long maturity balance sheets.…”