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Interest Rates and Net Interest Margins: The Impact of Monetary Policy

In: The Business of Banking

Author

Listed:
  • Paula Cruz-García

    (University of Valencia)

  • Juan Fernández de Guevara

    (University of Valencia
    Instituto Valenciano de Investigaciones Económicas)

  • Joaquín Maudos

    (University of Valencia
    Instituto Valenciano de Investigaciones Económicas)

Abstract

In this chapter, we examine the determinants of bank net interest margin, focusing on the effect of interest rates, and thus monetary policy decisions. The analysis is carried with a panel of banks from 32 OECD countries over the period 2003–2014. The results show a quadratic relationship between net interest margins and interest rates, implying that the variation of the latter has a greater effect when interest rates are low. An important policy implication of the results is that there is a trade-off between economic growth and financial stability associated with the impact of expansionary monetary policy when the level of interest rates is very low. As a result, if the current scenario of low and even negative interest rates persists for much longer in certain countries (such as in the Eurozone), it will have a negative effect on bank profitability and consequently on financial stability.

Suggested Citation

  • Paula Cruz-García & Juan Fernández de Guevara & Joaquín Maudos, 2017. "Interest Rates and Net Interest Margins: The Impact of Monetary Policy," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Giusy Chesini & Elisa Giaretta & Andrea Paltrinieri (ed.), The Business of Banking, chapter 0, pages 5-33, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-3-319-54894-4_2
    DOI: 10.1007/978-3-319-54894-4_2
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