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Retail Bank Interest Margins in Low Interest Rate Environments

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  • Jaakko Sääskilahti

    (University of Jyvaskyla)

Abstract

This paper examines the relationship between market interest rates and retail bank interest margins. I allow for non-linearities, i.e., differences in these relationships with varying interest rate environments, which have particular implications for bank profitability and the interest rate channel of monetary policy in a low interest rate environment. I find that the interest rate spread between stocks of loans and deposits, as well as between new loans and deposits, are generally positively related to market interest rates, mainly because of highly rigid interest rates on current account deposits. In a low interest rate environment, the combination of increasing core deposit rate rigidity and variable rate loans strengthens the positive relationship between market interest rates and the interest rate spread between stocks of loans and deposits, which exerts pressure on bank profitability. The results for the interest rate spread between new loans and deposits indicate that banks react to increased deposit rate rigidity by significantly increasing spreads on new loans. Such a reaction affects the interest rate channel of monetary policy.

Suggested Citation

  • Jaakko Sääskilahti, 2018. "Retail Bank Interest Margins in Low Interest Rate Environments," Journal of Financial Services Research, Springer;Western Finance Association, vol. 53(1), pages 37-68, February.
    • Handle: RePEc:kap:jfsres:v:53:y:2018:i:1:d:10.1007_s10693-016-0262-1
    DOI: 10.1007/s10693-016-0262-1
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    More about this item

    Keywords

    Retail banking; Bank interest margin; Low interest rate environment; Bank profitability; Interest rate channel of monetary policy;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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