The influence of monetary policy on bank profitability

Published in: International Finance, forthcoming.

This paper investigates how monetary policy affects bank profitability. We use data for 109 large international banks headquartered in 14 major advanced economies for the period 1995-2012. Overall, we find a positive relationship between the level of short-term rates and the slope of the yield curve (the "interest rate structure", for short), on the one hand, and bank profitability - return on assets - on the other. This suggests that the positive impact of the interest rate structure on net interest income dominates the negative one on loan loss provisions and on non-interest income. We also find that the effect is stronger when the interest rate level is lower and the slope less steep, ie that non-linearities are present. All this suggests that, over time, unusually low interest rates and an unusually flat term structure erode bank profitability.

JEL classification: C53, E43, E52, G21

Keywords: monetary policy, bank profitability, financial crisis

The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS or its member central banks.