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Inflation and Bank Profits: Monetary Policy Trade-offs

Author

Listed:
  • Katharina Bergant
  • Ms. Mai Hakamada
  • Mr. Divya Kirti
  • Rui Mano

Abstract

Given the recent surge in inflation and the resulting sharp monetary tightening, this note asks whether bank profits are exposed to inflation. While most banks tend to match income and expense exposures, 5 and 8 percent of banks in Advanced Economies (AE) and Emerging Market and Developing Economies (EMDE), respectively, are vulnerable to changes in inflation and interest rates due to differences in risk management practices and business structures, with 3 and 6 percent of AE and EMDE banks, respectively, at least as exposed as Silicon Valley Bank at the onset of its failure. If losses at individual banks leave room for wider panics—despite needed improvements in bank regulation and supervision and other ex ante measures—central banks may need to weigh raising rates to contain inflation against the potential for financial instability.

Suggested Citation

  • Katharina Bergant & Ms. Mai Hakamada & Mr. Divya Kirti & Rui Mano, 2025. "Inflation and Bank Profits: Monetary Policy Trade-offs," IMF Staff Discussion Notes 2025/001, International Monetary Fund.
  • Handle: RePEc:imf:imfsdn:2025/001
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    Keywords

    Inflation; Bank profitability; Monetary policy; Financial stability;
    All these keywords.

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