How do European banks portray the effect of policy interest rates and prudential behavior on profitability?

European policy interest rates have been low and trending downwards for almost a decade now and expectations do not seem to change. Hence, in such an environment, this paper investigates whether and how banks’ prudential behavior has influenced profitability across the European banking sector from 1999 to 2015. Using a dynamic panel model, we clearly find that banks’ financial resilience, proxied by the asymmetric Z-score and two financial ratios, affects profits: more cautious banks record higher profits. This result is confirmed by the two overall measures of profitability, namely the Return on Average Assets and Equity, but not for the Net Interest Margins. Furthermore, our analysis suggests that monetary policy's main instrument adversely affects bank income. Nevertheless, when policy interest rates are particularly low, the effect on Net Interest Margin is still positive, while the effect on the overall profitability becomes negative. These results induce that European banks succeed in increasing their profitability despite a compression of their net interest income.     

Sources of Bank Interest Rate Risk

We investigate bank stocks'sensitivity to changes in interest rates and the factors affecting this sensitivity. We focus on whether the exposure of commercial banks to interest rate risk is conditioned on certain balance sheet and income statement ratios. We find a significantly negative relation between bank stock returns and changes in interest rates over the period 1991–1996. We also find that bank characteristics measured from basic financial statement information explain bank stocks'sensitivity to interest rate changes. These results suggest that bank managers, analysts, and regulators can use this information to assess the relative risk exposure of banks.     

Keep the faith in banking: New evidence for the effects of negative interest rates based on the case of Finnish cooperative banks

This paper analyses the profitability of Finnish cooperative banks during the period of negative nominal interest rates. Contrary to expectations, the continuous decline in money market interest rates between 2009 and 2014, and the following negative rate era, did not have adverse effects on the profitability of banks at the beginning of negative interest rate period. Based on especially using a risk-adjusted measure for bank profitability, these results contrast with previous findings. In our findings, the increasing wholesale funding (WSF) ratio seems to be an important factor. However, after 2017 the banks have not been able to improve especially their risk-adjusted profitability so strongly anymore, because the WSF and the development of other than net interest margin returns have been in negative connection to it. In addition, the unconventional monetary policy actions seem not to improve profitability in the most recent observations of our data. These results raise serious concerns for the future of bank profitability during the prolonged period of negative interest rates.     

What lies beneath—Negative interest rates and bank lending

We study the transmission of negative interest rates to bank lending around an unexpected policy rate cut into deep negative territory by the Swiss National Bank (−0.75%). We exploit a rich data set on transaction-level corporate loans matched with bank balance sheet data. We find that banks more affected by negative interest rates offer looser lending terms and lend more than other banks. This result is consistent with the risk-taking channel, where a lower policy rate spurs bank risk-taking to maintain profits. The result implies that, even in such deep negative territory, the reversal rate has not yet been hit.     

State ownership and banks’ information rents: Evidence from China

In a lending relationship, a bank with an information advantage regarding its client tends to hold up the borrower and charge higher interest rates. We conjecture that state-owned enterprises (SOEs), with worse information asymmetry, are subject to greater information rents. State-owned banks place less emphasis on information production and hence extract lower rents compared to profit-maximizing private banks. We use the decline of loan interest rates around the borrowers’ equity initial public offerings (IPOs) as the proxy of banks’ information rents. We find SOEs in China experience larger declines in loan interest rates around their IPOs; the central government-controlled Big Four banks exhibit smaller declines in rates they charge, and their rate declines concentrate on loans made to SOEs.     

Bank-Specific Daily Interest Rate Adjustment in the Dutch Mortgage Market

This paper presents an empirical analysis of the interest rate setting behavior of the four largest banks in the Dutch mortgage market, using advertised interest rates at a daily frequency. The evidence for the long run pricing behaviour suggests that the banks operate in a competitive environment as they base their interest rates on funding cost. However, two banks appear to be less cost sensitive than the others. In the short run, most of the banks adjust their rates less strongly to funding cost increases than to decreases, which suggests competitive pressures. For one bank significant evidence is found for a quicker response to negative than to positive deviations of actual from desired interest rates.     

Impacts of sovereign risk premium on bank profitability: Evidence from euro area

We analyse the effects of low and negative interest rates and sovereign risk premium on bank profitability among 154 Eurozone banks during the period 2005–2019. In contrast to some of the results in the previous literature, we find that the euro area banks have not suffered too much from the extremely low and negative interest rate era regarding their net interest margins. However, the overall profitability has lowered clearly during the sample period, and the sovereign risk premium has a robust negative effect on all the overall profitability measures, both with risk-adjustment and without it, but it seems to have an increasing effect on the degree of wholesale funding and loan loss provisions. Hence, the profitability puzzle can be explained by a shift towards low-cost wholesale-based funding. Banks have also exercised more loan loss provisions because of the increment in overall risk of the economy. However, if the negative interest rate era still prevails for long, the banking sector faces serious problems based on our results.     

Bank Exposure to Interest Rate Risks During Financial Liberalization: Evidence from South Korea

This study documents the changing impact of long and short term interest rate risks on the equity prices of banks in South Korea during the process of financial liberalization. Consistent with the presence of regulatory constraints, Korean bank equity returns are found to be sensitive to both anticipated and unanticipated changes in interest rates in the first period (1976-81) when banks were largely under government control. However, during our last period (1989-99) of liberalization, Korean bank equity returns were found to have a positive association only with unanticipated short-term interest rates. Consistent with the ability to manage other interest rate risks successfully, in this last liberalization period, Korean bank equity returns had no association with long-term or with anticipated short-term interest rates. In view of the continued interest in banking and financial market liberalization among many Asian, African, and formerly socialist countries including China, these results should be of much banking and policy interest. JEL Classifications: G21, G28, E44, L89     

The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime

The study investigates how monetary policy affects bank risk-taking under a multiple-tool regime of Vietnam during 2007–2018. Particularly, we also consider the conditioning role of bank performance, broken down by bank profitability and cost efficiency, in this nexus. Using both dynamic and static panel models, we show that the liquidity injection initiated by the central bank’s asset purchases induces banks to take more risks, captured by the traditional Z-score and two alternative measures of credit risk. However, monetary policy easing through decreased interest rates is beneficial to the credit portfolio and financial stability of banks, which therefore challenges the functioning of the bank risk-taking channel. This startling result is robust across three different interest rate measures, including lending rates, refinance rates and rediscount rates. Further analysis reveals that our observed effects are alleviated for banks with higher performance — i.e., more profitable and efficient banks. This in-depth finding offers more insights into the “search for yield” incentive, based on the theory of information asymmetry and the two competing hypotheses of “bad management” and “cost skimping”.     

Banking in a Matching Model of Money and Capital

We introduce banks in a model of money and capital with trading frictions. Banks offer demand deposit contracts and hold primary assets to maximize depositors’ utility. If banks’ operating costs are small, banks reallocate liquidity eliminating idle balances and improving the allocation. At moderate costs, idle balances are reduced but not eliminated. At larger costs, banks are redundant. A central bank policy of paying interest on bank reserves can reverse inflation's distortionary effects, and increase welfare, but only when costs are small. The threshold levels of banks’ costs increase with inflation, suggesting inflation and banks’ utilization are positively associated.     

关于我国利率和利率传导关系的思考

当前我国银行体系利率大致可分为货币市场利率和信贷市场利率,其中由央行指定的利率主要有存贷款基准利率、再贴现率等。在货币市场上,隔夜同业拆借利率具有基准利率的地位。在信贷市场上,在特定时期,保持适当的存贷款利差具有积极意义。由于一些阻碍信贷市场与货币市场统一的制度安排的存在,这两个市场间的利率传导呈现出一定的不对称性。为推进利率市场化,进一步完善我国利率体系,下一步应逐步弥合市场分割,加强货币市场基准利率建设,培育商业银行利率定价能力。     

How does foreign entry affect domestic banking markets?

Using 7900 bank observations from 80 countries for the 1988–1995 period, this paper examines the extent and effect of foreign presence in domestic banking markets. We investigate how net interest margins, overhead, taxes paid, and profitability differ between foreign and domestic banks. We find that foreign banks have higher profits than domestic banks in developing countries, but the opposite is the case for developed countries. Estimation results suggest that an increased presence of foreign banks is associated with a reduction in profitability and margins for domestic banks.     

利率市场化条件下我国商业银行资产负债管理技术研究

随着货币市场的完善和利率市场化的发展,利率对我国商业银行收益水平的影响开始显现,适时引入资产负债管理技术对我国商业银行盈利水平的提高具有重要的现实意义和应用价值。本文以我国部分商业银行收益状况分析为基础,通过对目前国外主要资产负债管理技术的回顾,提出了符合我国国情的商业银行资产负债管理技术策略。     

利率市场化对商业银行存贷款利差的影响研究 ——基于价格型与数量型货币政策环境

将利率市场化引入做市商模型,分析银行存贷款利差的主要影响因素,并选取2006-2016中国银行业年度数据对利率市场化对银行存贷款利差的影响进行实证分析。结果显示：利率市场化与银行存贷款利差之间呈现倒U型关系,当利率市场化指数达到58.07的临界值时,银行存贷款利差将达到最大值10.61%;利率市场化对银行存贷款利差的影响存在异质性特征,其对股份制银行、国有银行与城商行的影响力度依次递减;货币政策对利率市场化存在反向抑制效应,这是由货币政策逆周期调控功能所决定的,相对于数量型货币政策,价格型货币政策的长期影响力度提高了1.508倍,短期影响力度提高了1.605倍;价格型货币政策对国有银行、城商行与股份制银行的影响力度依次递减,数量型货币政策对股份制银行、国有银行与城商行的影响力度依次递减。     

Monetary policy effects in times of negative interest rates: What do bank stock prices tell us?

This paper investigates bank stock performance following different monetary policy actions in times of positive and negative interest rates. Controlling for the broader stock market, monetary policy announcements that cause an unanticipated downward shift in the yield curve and a flattening of the shorter-end of the yield curve are found to persistently reduce bank stock prices once the interest rate environment is negative. Consistent with the deposits channel of monetary policy, the effects are larger and more persistent for banks that are relatively dependent on deposit funding. By contrast, a surprise movement in the slope of the longer-end of the yield curve does not impact bank stock prices in times of negative interest rates. Accounting data confirm that a parallel drop in the yield curve following a monetary policy decision in a negative interest rate environment hurts banks through shrinking deposit margins.     

Loan pricing under Basel capital requirements

We analyze the loan pricing implications of the reform of bank capital regulation known as Basel II. We consider a perfectly competitive market for business loans where, as in the model underlying the internal ratings based (IRB) approach of Basel II, a single risk factor explains the correlation in defaults across firms. Our loan pricing equation implies that low risk firms will achieve reductions in their loan rates by borrowing from banks adopting the IRB approach, while high risk firms will avoid increases in their loan rates by borrowing from banks that adopt the less risk-sensitive standardized approach of Basel II. We also show that only a very high social cost of bank failure might justify the proposed IRB capital charges, partly because the net interest income from performing loans is not counted as a buffer against credit losses. A net interest income correction for IRB capital requirements is proposed.     

Liquidity creation,regulatory capital,and bank profitability

We examine the interrelationships among liquidity creation, regulatory capital, and bank profitability of US banks. We find that regulatory capital and liquidity creation affect each other positively after controlling for bank profitability. However, this relationship is largely driven by small banks and primarily during non-crisis periods. It is also sensitive to the level of banks' regulatory capital and how it is measured. Furthermore, we find that banks which create more liquidity and exhibit higher illiquidity risk have lower profitability. Finally, the relationship between regulatory capital and bank performance is not linear and depends on the level of capitalization. Regulatory capital is negatively related to bank profitability for higher capitalized banks but positively related to profitability for lower capitalized banks. Therefore, a change in regulatory capital has differential impacts on bank performance. Our findings have various implications for policymakers and bank regulators.     

Ownership,interest rates and bank risk-taking in Central and Eastern European countries

We examine the impact of interest rates on bank risk-taking in 10 CEE economies and the Russian Federation for the 1997–2011 period taking explicitly into account the ownership status of banks, i.e., domestic vs. foreign owned. The results show that the risk-taking behavior differs between foreign and domestic banks. Foreign banks increased their risk-taking appetite as long run interest rates declined during the 2000s in all countries, while they behaved more aggressively in the 10 CEE countries, responding to the decline of the short term rates as well. This behavior stemmed mainly from higher capitalized banks. In turn, the risk-taking nexus is absent for domestic banks in the 10 CEE economies. Moreover, the solvency status of foreign banks remained essentially unaffected by monetary conditions in all countries while this does not hold for domestic banks in the Russian Federation.     

我国商业银行信贷选择与信贷配置效率的思考

文章对我国商业银行信贷配置效率、信贷选择等进行了实证检验。结果发现,我国商业银行优化信贷配置作用并不突出,信贷资源配置效率总体较低,且货币政策趋松阶段的配置效率要低于政策趋紧阶段的配置效率。文章指出,商业银行信贷配置效率较低,主要原因并非是产权不清晰或中小金融机构数量少,而是由于在国内存贷款利差保护下,商业银行具有较高的惰性,信贷选择过度注重安全性,忽视与项目盈利能力有关的盈利性。     

我国上市银行利差决定因素分析

本文对国内2000～2009年间上市银行利差率的决定因素按照银行经营的安全、效率和盈利指标,结合行业和宏观经济状况等因素进行了实证分析。结论表明,虽然股份制上市银行经营状况普遍优于国有银行,但其经营行为可能会部分抵消央行的利率政策,同时股票市场发展对银行经营没有显著性影响。