'Low-for-Long' Interest Rates and Banks' Interest Margins and Profitability: Cross-Country Evidence

42 Pages Posted: 27 Feb 2017

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Nicholas Coleman

Board of Governors of the Federal Reserve System

Michael Donnelly

Board of Governors of the Federal Reserve System

Date Written: 2017-02

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.

Keywords: Interest rates, Bank profitability, Net interest margin, Low-for-long

JEL Classification: G21, E43

Suggested Citation

Claessens, Stijn and Coleman, Nicholas and Donnelly, Michael, 'Low-for-Long' Interest Rates and Banks' Interest Margins and Profitability: Cross-Country Evidence (2017-02). FRB International Finance Discussion Paper No. 1197. Available at SSRN: https://ssrn.com/abstract=2923972 or http://dx.doi.org/10.17016/IFDP.2017.1197

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Nicholas Coleman

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Michael Donnelly

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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