DP13752 Monetary Policy and Bank Profitability in a Low Interest Rate Environment: A Follow-up and a Rejoinder

Author(s): Charles A Goodhart, Ali Kabiri
Publication Date: May 2019
Keyword(s): Bank profitability, credit extension, Low interest rates, Net interest margin
JEL(s): E52, G18, G21, G28
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13752

There is a debate about the effect of the extremely low, or even negative, interest rate regime on bank profitability. On the one hand it raises demand and thereby adds to bank profits, while on the other hand it lowers net interest margins, especially at the Zero Lower Bound. In this paper we review whether the prior paper by Altavilla, Boucinha and Peydro (2018) on this question for the Eurozone can be generalized to other monetary blocs, i.e. USA and UK. While our findings have some similarity with their earlier work, we are more concerned about the possible negative effects of this regime, not only on bank profitability but also on bank credit extension more widely.