Bank Intermediation Activity in a Low Interest Rate Environment
31 Pages Posted: 7 Oct 2019
Date Written: September 2019
This paper investigates how the prolonged period of low interest rates affects bank intermediation activity. We use data for 113 large international banks headquartered in 14 major advanced economies during the period 1994-2015. We find that low interest rates induce banks to shift their activities from interest-generating to fee-related and trading activities. This rebalancing is stronger for low capitalised banks. Banks also moderately adjust their funding structure, away from short-term market funding towards deposits. We observe a concomitant decline in the risk-weighted asset ratio and a reduction in loan-loss provisions, which is consistent with signs of evergreening.
Keywords: bank business models, financial crisis, monetary policy
JEL Classification: C53, E43, E52, G21
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