The effect of negative real interest rates on bank profitabilityTools Tan, Sin Yee (2021) The effect of negative real interest rates on bank profitability. [Dissertation (University of Nottingham only)]
AbstractNegative real interest rates have been existed since 1990s, but previous literature concern only the effect of negative nominal interest rates. In this study, I examine the effect of negative real interest rates on bank profitability. I also investigate whether the effect depends on bank and country-specific characteristics, which include bank size, bank capitalization, banking sector competition, and ratio of floating loans. The dataset is an unbalanced panel dataset that consists of 810 listed banks across 33 OECD countries. I use two profitability measures as dependent variables: net interest margin (NIM) and return on assets (ROA). With fixed-effect models, I find that negative real interest rates deteriorate ROA, but negative real interest rates are unlikely to compress NIM. By including an interaction term, I find that the effect of negative real interest rates does not seem to vary along bank and country-specific characteristics. The estimates of the interaction term are mostly statistically insignificant; however, the economic impact of the country-specific characteristics is noted to be considerably large. The baseline results are robust after I include additional control variables to control for price of deposits, price of loans, and other unconventional monetary policy. Nevertheless, inclusion of the estimates term may change the estimates of the effect of negative real interest rates on bank profitability in some specifications. The effect of negative real interest rates on ROA is also robust to different definition of real interest rates, but the results in which NIM is the dependent variables are driven by the different definition of real interest rates. If I define real interest rates with short-term money market rate instead of the central bank policy rates, the estimates of the effect of negative real interest rates on bank profitability become positive, but they remain statistically and economically insignificant. Overall, this study provides some evidences for the adverse impact of negative real interest rates, which may be helpful in evaluating the effectiveness of monetary policy.
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