Simple Banking: Profitability and the Yield Curve

Alessandri, Piergiorgio; Nelson, Benjamin

doi:10.1111/jmcb.12172

Cited by 215 publications

(59 citation statements)

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“…They pay particular attention to the relationship between interest rates and bank profitability using both a theoretical model and empirical investigation of British banks. Our paper controls for money market conditions and confirms Alessandri and Nelson (2015)'s finding that in the short run increases in market rates compress the interest margin. This is not the main focus of the paper.…”

Section: Introductionsupporting

confidence: 70%

“…Compared with Albertazzi and Gambacorta (2009) and Bolt et al (2012), our paper also puts a stronger emphasis on bank balance sheet items and their interaction with macroeconomic conditions. Alessandri and Nelson (2015) examine the impact of funding costs on bank profitability. They pay particular attention to the relationship between interest rates and bank profitability using both a theoretical model and empirical investigation of British banks.…”

Section: Introductionmentioning

confidence: 99%

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What happened to profitability? Shocks, challenges and perspectives for euro area banks

Cheng¹,

Mevis²

2018

The European Journal of Finance

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This paper uses a newly constructed dataset including financial statement information of 311 banks in the euro area to analyse the evolution of bank profitability before and after the Global Financial Crisis and the subsequent European crisis. We first document the general trends in the changes in banks' profitability with a particular focus on country and bank heterogeneity. We find that the profitability of banks in different parts of the monetary union was hit by multiple shocks of different nature. Based on this, we then propose an econometric analysis of the drivers behind the evolution of bank profitability by discriminating factors relative to macroeconomic conditions, bank funding and portfolio structures, and new banking regulations in the euro area.JEL Classification: G21, G28, G33, L25 Keywords: bank, profit, return on asset, bank regulation, bank business model * We thank members of the Economics, Strategy and Banking department at the European Stability Mechanism for very fruitful discussions. Special thanks go to Antonello D'Agostino, Aitor Erce and Paolo Fioretti. We also thank the scientific committee of 2015 IFABS conference.

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Section: Introductionsupporting

confidence: 70%

Section: Introductionmentioning

confidence: 99%

What happened to profitability? Shocks, challenges and perspectives for euro area banks

Cheng¹,

Mevis²

2018

The European Journal of Finance

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“…Numerous studies have demonstrated a significant relationship between bank profitability and the yield curve slope. Recently, Alessandri and Nelson (2015) show that the effect might be different in the short and the long run. In the long run, both the level and the slope of the yield curve contribute positively to profitability, while in the short run higher market rates compress interest margins, consistently with loan pricing frictions.…”

Section: Transmission Of Cnb and Ecb Monetary Policy To Banks' Capitamentioning

confidence: 99%

Monetary policy and macroprudential policy: Rivals or teammates?

Malovaná

Frait

2017

Journal of Financial Stability

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper sheds some light on situations in which monetary and macroprudential policies may interact (and potentially get into conflict) and contributes to the discussion about the coordination of those policies. Using data for the Czech Republic and five euro area countries we show that monetary tightening has a negative impact on the credit-to-GDP ratio and the non-risk-weighted bank capital ratio (i.e. a positive impact on bank leverage), while these effects have strengthened considerably since mid-2011. This supports the view that accommodative monetary policy contributes to a build-up of financial vulnerabilities, i.e. it boosts the credit cycle. On the other hand, the effect of the higher bank capital ratio is associated with some degree of uncertainty. For these and other reasons, coordination of the two policies is necessary to avoid an undesirable policy mix preventing effective achievement of the main objectives in the two policy areas. Terms of use: Documents in

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“…To sum up, concerning the relationship between market interest rates and the banks' net interest margins, there seems to be a tendency for the long-run effect to be more strongly positive than the short-run effect, where the empirical results, especially with respect to the short-run effect, are mixed even with respect to the direction of the effect. Alessandri and Nelson (2014) provide a theoretical model with a positive relationship between the interest rate level and the banks' net interest margin. They assume that a bank's mark-up on loans is a constant multiple of the market interest rate.…”

Section: Literaturementioning

confidence: 99%

Banks' Net Interest Margin and the Level of Interest Rates

Busch

Memmel

2017

Credit and Capital Markets – Kredit und Kapital

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Reproduction permitted only if source is stated. ISBN Non-technical summary Research QuestionNet interest income is the main source of income for banks. As a result of carrying out maturity transformation, banks' net interest income is affected in the short run by the dynamics in the term structure. Therefore, as a rule, an increase in interest rates leads to a decline in net interest income in the following years. However, little is known about the medium and long-term effects of changes in the interest rate level. Anecdotal evidence suggests that net interest income benefits in the medium and long term if interest rates increase. This paper also investigates the effects of the low interest rate environment on the margin for customer deposits. ContributionThe short-run effect of a change in the interest rate level is widely discussed and empirically investigated in the literature. The medium and long-term effects are harder to detect, however, because short-term developments mask this effect and the applied datasets often cover a period of only up to 20 years. In this paper, the authors use a dataset that covers more than 40 years and a model which nevertheless allows them to differentiate between the short-and long-run effects of a rise in the interest rate level. ResultsThe paper shows that banks' net interest income benefits over the medium to long-term horizon if the interest rate level increases. An increase of 100 basis points in the interest rate level leads to an increase in the net interest margin of about 7 basis points. It is therefore possible to demonstrate empirically that the short-term effect and medium to long-term effects on banks' net interest margin are diametrically opposed. Furthermore, the authors find that the margins for retail deposits have declined by up to 97 basis points owing to the low interest rate environment. Nichttechnische Zusammenfassung FragestellungDas Zinsergebnis ist die wichtigste Einnahmequelle der Banken. Dadurch, dass Banken Fristentransformation betreiben, ist das Zinsergebnis in der kurzen Frist von der Dynamik der Zinsstruktur betroffen. Ein Ansteigen der Zinsen führt dadurch in der Regel zu abnehmenden Zinsergebnissen in den Folgejahren. Über die mittel-und langfristige Wirkung von Änderungen des Zinsniveaus ist dagegen wenig bekannt. Anekdotische Evidenz legt nahe, dass das Zinsergebnis mittel-und langfristig profitiert, wenn das Zinsniveau ansteigt. Auch wird in dem Papier die Wirkung untersucht, die das gegenwärtige Niedrigzinsumfeld auf die Margen der Kundeneinlagen hat. BeitragDer kurzfristige Effekt einer Veränderung der Zinsstrukturkurve wird in der Literatur ausgiebig diskutiert und empirisch untersucht. Mittel-und langfristige Entwicklungen dagegen sind schwerer nachzuweisen, weil kurzfristige Entwicklungen den Effekt überlagern und die verwendeten Zeitreihen in der Regel nur bis zu 20 Jahre betragen. In diesem Papier verwenden die Autoren einen Datensatz, der mehr als 40 Jahre umfasst, und ein entsprechend spezifiziertes Modell, das es ihnen erlaubt, ...

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Simple Banking: Profitability and the Yield Curve

Cited by 215 publications

References 55 publications

What happened to profitability? Shocks, challenges and perspectives for euro area banks

What happened to profitability? Shocks, challenges and perspectives for euro area banks

Monetary policy and macroprudential policy: Rivals or teammates?

Banks' Net Interest Margin and the Level of Interest Rates

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