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Do Net Interest Margins and Interest Rates Move Together?

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Many market participants assume that, as the Federal Reserve tightens monetary policy, and market rates increase in response, banks will be better off because their net interest margins will also increase. As a way to understand the origins of this expectation, in this Economic Brief we look at the relationship between the federal funds rate and the average net interest margin for U.S. banks since the mid-1980s. We find that the relationship is not as clear-cut as one might suspect.

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  • Huberto M. Ennis & Helen Fessenden & John R. Walter, 2016. "Do Net Interest Margins and Interest Rates Move Together?," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue May.
    • Handle: RePEc:fip:fedreb:00040
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    File URL: https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2016/pdf/eb_16-05.pdf
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    Cited by:

    1. Melchisedek Joslem Ngambou Djatche, 2022. "Monetary policy, prudential policy and bank's risk‐taking: A literature review," Journal of Economic Surveys, Wiley Blackwell, vol. 36(5), pages 1559-1590, December.
    2. Zachary Bethune & Guillaume Rocheteau & Tsz-Nga Wong & Cathy Zhang, 2022. "Lending Relationships and Optimal Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(4), pages 1833-1872.
    3. Ms. Enrica Detragiache & Mr. Thierry Tressel & Ms. Rima A Turk, 2018. "Where Have All the Profits Gone? European Bank Profitability Over the Financial Cycle," IMF Working Papers 2018/099, International Monetary Fund.
    4. Katharina Allinger & Julia Wörz, 2020. "The sensitivity of banks’ net interest margins to interest rate conditions in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q1/20, pages 51-70.
    5. Gerlach, Jeffrey R. & Mora, Nada & Uysal, Pinar, 2018. "Bank funding costs in a rising interest rate environment," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 164-186.

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