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The Impact of Monetary Policy on Bank Profitability

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Banking and Beyond

Abstract

This chapter analyzes the effect of the monetary policy on both net interest margin and bank profitability using a panel data from 31 OECD countries over the period 2000–2017. The main results show that expansionary monetary policy measures adopted in numerous economies had a negative impact on net interest margins and, therefore, on bank profitability. The relationship between interest rates and the slope of the yield curve with both the net interest margin and profitability is non-linear, more specifically concave. This suggests that the negative impact of low interest rates and the flat yield curve is greater the lower and flattened they are, respectively. Therefore, a potential normalization of monetary policy would have highly beneficial effects on restoring margins and profitability.

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Notes

  1. 1.

    Some papers find that monetary policy is less effective in stimulating credit growth when interest rates are very low (Borio and Gambacorta 2017), and other studies even find that negative interest rates have a contracting effect on the credit supply (Heider et al. 2018; Brunnermeier and Koby 2018). The paper of Arce et al. (2018) suggests that there is no significant difference between the volume of credit offered by banks affected or not by negative interest rates.

  2. 2.

    Austria, Australia, Belgium, Canada, Switzerland, Colombia, Czech Republic, Germany, Denmark, Spain, Finland, France, United Kingdom, Greece, Ireland, Iceland, Italy, Japan, Luxembourg, Latvia, Netherlands, Norway, New Zealand, Poland, Portugal, Russian Federation, Sweden, Slovenia, Slovak Republic, United States and South Africa.

  3. 3.

    As there are no data in the databases used about the number of employees for the entire sample, the ratio of staff cost to total assets as a proxy for the price of labor has been used, instead of the ratio of staff cost to number of employees.

  4. 4.

    Note that the cost function differs from the traditional one in that it includes, in addition to the financial and operational costs, the provisions that a bank sets aside each year (as a proxy ex-post of the cost of risk). Given that the cost is included in the dependent variable, it has been necessary to include the unit cost of this productive input that we can call “risk” as a determinant, approximating as a ratio between financial asset impairment losses and the volume of lending.

  5. 5.

    Note that this ratio is a measure of capitalization and presents limitations as a measure of risk aversion, since it includes the minimum capital required by the regulation. However, unfortunately, there is no better proxy for this variable.

  6. 6.

    Unfortunately, the interest rates for Japan between 2000 and 2002 are not available.

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Acknowledgments

I am gratefully acknowledge financial support of the Spanish Ministry of Science and Innovation (research project ECO2017-84858-R) and Spanish Ministry of Education (FPU2014/00936).

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Authors and Affiliations

  1. Department of Economic Analysis, University of Valencia, Valencia, Spain

    Paula Cruz-García

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  1. Paula Cruz-García
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Correspondence to Paula Cruz-García .

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Editors and Affiliations

  1. Department of Management, Ca’ Foscari University of Venice, Venice, Italy

    Caterina Cruciani

  2. Department of Management, Ca’ Foscari University of Venice, Venice, Italy

    Gloria Gardenal

  3. Department of Management, Ca’ Foscari University of Venice, Venice, Italy

    Elisa Cavezzali

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Cruz-García, P. (2020). The Impact of Monetary Policy on Bank Profitability. In: Cruciani, C., Gardenal, G., Cavezzali, E. (eds) Banking and Beyond. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-45752-5_6

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  • DOI: https://doi.org/10.1007/978-3-030-45752-5_6

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