February 2017

"Low-For-Long" Interest Rates and Banks' Interest Margins and Profitability: Cross-Country Evidence

Stijn Claessens, Nicholas Coleman, and Michael Donnelly


Interest rates in many advanced economies have been low for almost a decade now and are often expected to remain so. This creates challenges for banks. Using a sample of 3,385 banks from 47 countries from 2005 to 2013, we find that a one percentage point interest rate drop implies an 8 basis points lower net interest margin, with this effect greater (20 basis points) at low rates. Low rates also adversely affect bank profitability, but with more variation. And for each additional year of "low for long", margins and profitability fall by another 9 and 6 basis points, respectively.

Keywords: Interest rates, Bank profitability, Net interest margin, Low-for-long

DOI: https://doi.org/10.17016/IFDP.2017.1197

PDF: Full Paper

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Last Update: January 09, 2020