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Impact of base rate cuts on bank profitability

Author

Listed:
  • Ádám Banai

    (Magyar Nemzeti Bank (Central Bank of Hungary))

  • Zsuzsanna Hosszú

    (Magyar Nemzeti Bank (Central Bank of Hungary))

  • Gyöngyi Körmendi

    (Magyar Nemzeti Bank (Central Bank of Hungary))

  • Bence Mérõ

    (Magyar Nemzeti Bank (Central Bank of Hungary))

Abstract

The adequate long-term earnings potential of the financial intermediary system is essential from the perspective of financial stability. Therefore, the impact of economic developments, e.g. monetary policy, on the profitability of the banking system is an important issue. Central bank interest rate cuts affect the profitability of the Hungarian banking sector through numerous channels. In our study, we provide an overview of the impact mechanisms relevant to the relationship between the central bank base rate and banks’ profitability. We then proceed to quantify the impact of an interest rate reduction of 100 basis points on the profitability of the banking sector. According to our findings, the profitability effect over a two-year horizon amounts to HUF –26.9 billion (in other words, the average annual difference is HUF –13.4 billion) which, while not negligible, does not influence the monetary policy transmission materially. Since our calculations depend on the initial status of the macroeconomic environment, our results should not be applied automatically at any interest rate level.

Suggested Citation

  • Ádám Banai & Zsuzsanna Hosszú & Gyöngyi Körmendi & Bence Mérõ, 2014. "Impact of base rate cuts on bank profitability," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 9(2), pages 18-22, July.
    • Handle: RePEc:mnb:bullet:v:9:y:2014:i:2:p:18-22
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    File URL: https://www.mnb.hu/letoltes/banai-hosszu-kormendi-mero.pdf
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    References listed on IDEAS

    as
    1. Katalin Szilágyi & Dániel Baksa & Jaromir Benes & Ágnes Horváth & Csaba Köber & Gábor D. Soós, 2013. "The Hungarian Monetary Policy Model," MNB Working Papers 2013/1, Magyar Nemzeti Bank (Central Bank of Hungary).
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    Cited by:

    1. Bell, Michael G.H. & Wang, Ze & Cheung, Kam-Fung & Zhu, Shengda, 2023. "A system dynamics analysis of the trans-Pacific trade lane during the pandemic," Transportation Research Part A: Policy and Practice, Elsevier, vol. 176(C).

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    More about this item

    Keywords

    low interest rate environment; profitability of banking sector;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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