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Prospects for euro area bank lending margins in an extended low-for-longer interest rate environment

Author

Listed:
  • Albertazzi, Ugo
  • Andreeva, Desislava
  • Belloni, Marco
  • Grassi, Alberto
  • Gross, Christian
  • Mosthaf, Jonas
  • Shakir, Tamarah

Abstract

We examine some aspects of how the low-for-even-longer interest rate environment may affect bank lending margins and overall financial stability. We find evidence that margins fall more in response to declines in nominal short-term rates when these are low to begin with. The compression of margins reflects the sluggish response to further policy rate cuts of deposit rates as these approach the zero lower bound. Moreover, the analysis indicates that bank margins and overall profitability are influenced by both the level of real rates and, more materially, the level of inflation expectations embedded in nominal rates, which reflects the fact that bank profits are partly akin to seigniorage. JEL Classification: G2, E43

Suggested Citation

  • Albertazzi, Ugo & Andreeva, Desislava & Belloni, Marco & Grassi, Alberto & Gross, Christian & Mosthaf, Jonas & Shakir, Tamarah, 2020. "Prospects for euro area bank lending margins in an extended low-for-longer interest rate environment," Financial Stability Review, European Central Bank, vol. 2.
    • Handle: RePEc:ecb:fsrart:2020:0002:2
    Note: 451871
    as

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    File URL: https://www.ecb.europa.eu//pub/financial-stability/fsr/special/html/ecb.fsrart202011_02~c984477181.en.html
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    Citations

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    Cited by:

    1. Christian Bittner & Diana Bonfim & Florian Heider & Farzad Saidi & Glenn Schepens & Carla Soares, 2022. "The Augmented Bank Balance-Sheet Channel of Monetary Policy," ECONtribute Discussion Papers Series 149, University of Bonn and University of Cologne, Germany.
    2. Anthony Brassil, 2022. "The Consequences of Low Interest Rates for the Australian Banking Sector," RBA Annual Conference Papers acp2022-04, Reserve Bank of Australia, revised Dec 2022.
    3. Édouard Fernandez-Bollo & Desislava Andreeva & Maciej Grodzicki & Lise Handal & Rose Portier, 2021. "Euro area bank profitability and consolidation," Revista de Estabilidad Financiera, Banco de España, issue Primavera.
    4. Édouard Fernandez-Bollo & Desislava Andreeva & Maciej Grodzicki & Lise Handal & Rose Portier, 2021. "Euro area bank profitability and consolidation," Financial Stability Review, Banco de España, issue Spring.
    5. Édouard Fernandez-Bollo & Desislava Andreeva & Maciej Grodzicki & Lise Handal & Rose Portier, 2021. "Euro area bank profitability and consolidation," Financial Stability Review, Banco de España, issue Spring.
    6. policy, Work stream on macroprudential & Albertazzi, Ugo & Martin, Alberto & Assouan, Emmanuelle & Tristani, Oreste & Galati, Gabriele & Vlassopoulos, Thomas, 2021. "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area," Occasional Paper Series 272, European Central Bank.

    More about this item

    Keywords

    bank profitability; inflation expectations; lending margins; low interest rate environment;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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