Simple Banking: Profitability and the Yield Curve

Alessandri, Piergiorgio; Nelson, Benjamin

doi:10.2139/ssrn.2413438

Cited by 54 publications

(51 citation statements)

References 144 publications

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“…Recent studies have also highlighted the possible trade-off between accommodative monetary policy and bank profitability. In general, the empirical evidence found in these studies suggests an adverse impact of monetary policy easing on net interest margins (Alessandri and Nelson, 2015;Borio et al, 2017), with amplification effects in low interest rate environments (Claessens et al, 2017).…”

Section: Ecb Working Paper 2105 October 2017mentioning

confidence: 82%

“…On the one hand, the flattening of the yield curve typically associated with this type of policy may reduce the returns from maturity transformation activities and thus compress banks' net interest margins (e.g. Gambacorta, 2008;Alessandri and Nelson, 2015;Altavilla, Canova and Ciccarelli, 2016). On the other hand, QE may improve bank profitability by boosting demand for credit, as the policy is transmitted to the real economy.…”

Section: Stylised Factsmentioning

confidence: 99%

“…This is because such measures provide abundant access to central bank liquidity and lower the cost of debt with positive consequences for bank funding and borrower creditworthiness respectively, thereby supporting bank capital and reducing non-performing loans and loan loss provisioning (Bernanke and Gertler, 1995;Praet, 2016;Bernanke, 2007;Diamond and Rajan, 2006;Freixas and Jorge, 2008;Karadi, 2011, 2013;Kiyotaki and Moore, 2012;Freixas, Martin and Skeie, 2011;Gale, 2009 and2014). At the same time, there may also be some downsides associated with conventional and unconventional monetary policy easing (Rajan, 2005;Taylor, 2008;Allen and Rogoff, 2011;Stein, 2012 and2014;Stiglitz, 2016), including a potential reduction in net interest income (Borio et al, 2017;Alessandri and Nelson, 2015) which could ultimately hamper the transmission of monetary policy (Brunnermeier and Koby, 2017). The net effect of monetary policy on bank profitability therefore remains an empirical question.…”

Section: Introductionmentioning

confidence: 99%

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Changes in Monetary Policy and Banks' Net Interest Margins: A Comparison across Four Tightening Episodes

et al. 2019

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Section: Ecb Working Paper 2105 October 2017mentioning

confidence: 82%

Section: Stylised Factsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Changes in Monetary Policy and Banks' Net Interest Margins: A Comparison across Four Tightening Episodes

et al. 2019

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“…Apart from this, numerous other papers focus only the development of banks' net interest margin and banks' net interest income due to interest rate movements or evaluate short-, medium-and long-term effects of interest changes on these key figures (Busch & Memmel 2015;English 2002). Furthermore, several articles focus on the profitability of banks depending on the interest rate level and how bank profitability varies with interest rate changes (Alessandri, 2014;Dietrich & Wanzenried, 2014;Genay & Podjasek, 2014). Here, Genay and Podjasek (2014) provide interesting insights as their US market research shows that steeper yield curves increase banks' net interest margin and that yield curve changes impact smaller banks more heavily than larger ones.…”

Section: Introductionmentioning

confidence: 99%

Evaluation of Banks' Interest Rate Risk: An Alternative Approach

Lichtner

Riekeberg

Thießen

et al. 2018

AEF

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Interest rate risk is often assessed through parallel yield curve shifts of 100, 200 or 400 basis points. In order to provide a more realistic view, we did simulations based on periods of growing interest rates that actually occurred in the past. These simulations show that non-bank deposits and non-bank loans react more strongly to rising interest rates than certain interbank and security positions. Existing research usually overestimates related risks slightly as it does not take the interest-elastic reactions of non-banks into account. We found three types of effects. Firstly, the direct earnings effect stems from changed market interest rates applied to constant balance sheet positions. This effect is typically measured by straightforward models. Secondly, to increase accuracy, we identified an indirect earnings effect. Customers react to interest rate changes, and therefore balance sheet positions increase or decrease. The size of this effect depends on how strongly they react, i. e. their interest elasticity. Thirdly, the induced earnings effect results from a bank’s reactions in an attempt to compensate for the changed business volume.

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“…The related literature concerning bank profitability and monetary policy usually examines the factors that contribute to bank profitability via monetary policy. For example, English (2002), Alessandri and Nelson (2015), and Borio, Gambacorta, and Hofmann (2015) linked monetary policy to bank profitability by way of increasing various profit margins at banks. In contrast, the current study analyzes the differences in loan growth in different types of profitable banks given the same monetary policy.…”

Section: Introductionmentioning

confidence: 99%

Bank profits, loan activity, and monetary policy: evidence from the FDIC's Historical Statistics on Banking

Orzechowski

2016

Rev Financ Econ

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a b s t r a c tThis paper examines the long-run relationship between bank profits, loan growth, and monetary policy at different types of profitable banks. U.S. commercial bank data are analyzed from the FDIC's Historical Statistics on Banking from 1966 to 2013. The banks are divided into two groups based on their relative profitability (above or below the average profit rate) to examine their real estate and commercial loan activities. The bank's loan portfolio allocation (i.e., the ratio between real estate and commercial loans) is also examined to see if it has a relationship with monetary policy. The study finds evidence that monetary policy has a slightly larger negative relationship with real estate loans in banks with above average profits than with their less profitable peers. The analysis also finds evidence suggesting that commercial loan growth in low-profit banks may be more sensitive to their loan loss provisions than to monetary policy. The loan portfolio ratio shows a significant negative relationship with monetary policy and a positive relationship with provisions. The analysis reveals a positive coefficient or 'perverse result' between some of the commercial loan growth measures and monetary policy that may be explained by portfolio shifting at banks.

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Simple Banking: Profitability and the Yield Curve

Cited by 54 publications

References 144 publications

Changes in Monetary Policy and Banks' Net Interest Margins: A Comparison across Four Tightening Episodes

Changes in Monetary Policy and Banks' Net Interest Margins: A Comparison across Four Tightening Episodes

Evaluation of Banks' Interest Rate Risk: An Alternative Approach

Bank profits, loan activity, and monetary policy: evidence from the FDIC's Historical Statistics on Banking

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