Bank Profitability and Risk-Taking Under Low Interest Rates

41 Pages Posted: 19 Jul 2017

See all articles by Jacob Antoon Bikker

Jacob Antoon Bikker

De Nederlandsche Bank; Utrecht University - School of Economics

Tobias Vervliet

De Nederlandsche Bank

Date Written: July 11, 2017

Abstract

The aim of this paper is to investigate the impact of the unusually low interest rate environment on the soundness of the US banking sector in terms of profitability and risk-taking. Using both dynamic and static modeling approaches and various estimation techniques, we find that the low interest rate environment indeed impairs bank performance and compresses net interest margins. Nonetheless, banks have been able to maintain their overall level of profits, due to lower provisioning, which in turn may endanger financial stability. Banks did not compensate for their lower interest income by expanding operations to include trading activities with a higher risk exposure.

Keywords: profitability, risk-taking, low interest rate environment, (dynamic) panel data models

JEL Classification: G21

Suggested Citation

Bikker, Jacob Antoon and Vervliet, Tobias, Bank Profitability and Risk-Taking Under Low Interest Rates (July 11, 2017). De Nederlandsche Bank Working Paper No. 560, Available at SSRN: https://ssrn.com/abstract=3002480 or http://dx.doi.org/10.2139/ssrn.3002480

Jacob Antoon Bikker (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

Tobias Vervliet

De Nederlandsche Bank ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

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