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Low Interest Rates and Bank Profits
The Fed’s December 2015 decision to raise interest rates after an unprecedented seven-year stasis offers a chance to assess the link between interest rates and bank profitability. A key determinant of a bank’s profitability is its net interest margin (NIM)—the gap between an institution’s interest income and interest expense, typically normalized by the average size of its interest-earning assets. The aggregate NIM for the largest U.S. banks reached historic lows in the fourth quarter of 2015, coinciding with the “low for long” interest rate environment in place since the ...
Why Does the Yield Curve Predict GDP Growth? The Role of Banks
We provide evidence on the effect of the slope of the yield curve on economic activity through bank lending. Using detailed data on banks’ lending activities coupled with term premium shocks identified using high-frequency event study or instrumental variables, we show that a steeper yield curve associated with higher term premiums (rather than higher expected short rates) boosts bank profits and the supply of bank loans. Intuitively, a higher term premium represents greater expected profits on maturity transformation, which is at the core of banks’ business model, and therefore ...
Community Bank Performance: How Important are Managers?
Community banks have long played an important role in the U.S. economy, providing loans and other financial services to households and small businesses within their local markets. In recent years, technological and legal developments, as well as changes in the business strategies of larger banks and non-bank financial service providers, have purportedly made it more difficult for community banks to attract and retain customers, and hence to survive. Indeed, the number of community banks and the shares of bank branches, deposits, banking assets, and small business loans held by community banks ...