DP11842 "Low-For-Long” Interest Rates and Banks' Interest Margins and Profitability: Cross-Country Evidence

Author(s): Stijn Claessens, Nicholas Coleman, Michael Donnelly
Publication Date: February 2017
Keyword(s): Bank profitability, interest rates, Low-for-long, Net interest margin
JEL(s): E43, G21
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11842

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.