Friday | 30 Oct 2020
CEPS Project

How do low and negative interest rates affect banks’ profitability in the euro area?


The impact of low(er) interest rates on bank profits is a priori ambiguous. It depends on the business model of the bank, the strength of the competition and the general economic environment. Most of the more recent empirical studies tend to find a positive relationship between interest rates (or the yield curve) and bank profits. However, this might have been due to the fact that rates used to be high during good times, when loan losses were low and demand for loans was high. Moreover, bank profitability has not declined notably in those countries that were among the first to adopt negative rates (Switzerland, Denmark and Sweden). The overall conclusion is that negative rates and low long-term rates constitute more of a contributing factor than the key underlying reason for the currently low profitability of banks in the euro area. Other broader trends, like the continuing tightening of regulation and the savings surplus of the euro, are likely to be more

This project was awarded under the Framework Service Contract for the provision of external expertise in the field of monetary and economic affairs (Monetary dialogues) (IP/A/ECONMD/FWC/2014-026/C6) with the European Parliament. The full list of CEPS’ Framework Contracts is available here.

Daniel Gros

Distinguished Fellow

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