Low Interest Environments: An Analysis of Banking Profitability in the Euro Area

  • After the global financial crisis of 2008, central banks in many advanced economies reacted with an expansionary monetary policy to counteract deflation. Various economies have reached the zero-lower bound ever since, but central banks have still been involved in asset purchase programs to further stimulate the economy and to reach price stability goals. This paper examines the changes in income structures commercial banks face because of the low interest environment. Concluding the theoretical impact of a low-interest environment, it can be said that banking profitability worsens in the interest business mainly because of the zero-lower bound whereas banks benefit in non-interest operations and loan loss provisions as they diversify their business and occur fewer nonperforming loans. Through the risk-taking channel, banks change their perception towards risk and are more willing to commit to riskier business but this increased risk-taking does not threat financial stability. The empirical analysis of 112 banks of the Euro area confirms that relevant bank key performance indicators deteriorate, especially after the global financial crisis in 2008. The conducted regression analysis indicates that the net interest margin is compressed because of the zero-lower bound and persistent low short-term rates and the shape of the yield curve. For key performance indicators of return on average assets and return on average equity the positive link is only given for the short-term interest rates but not the yield curve. For these key performance indicators, a sound economy is more important than the interest rate level. Overall, the banking sector of the Eurozone appears to be not immediately threatened by a low-interest environment as they were able to increase non-interest related income. In the long run, higher market interest rates, however, are needed to establish profitability in the interest business.

Export metadata

Additional Services

Share in Twitter Search Google Scholar
Metadaten
Author:Jonas Rissler
Advisor:Marc P. Radke
Document Type:Bachelor Thesis
Language:English
Year of Completion:2018
Granting Institution:Hochschule Furtwangen
Date of final exam:2018/08/14
Release Date:2018/11/28
Tag:Banks; Euro; Interest; Profitability; Rate
Pagenumber:70
Degree Program:IBW - Internationale Betriebswirtschaft
Functional area:Finance & Accounting
Access Rights:Innerhalb der Hochschule
Licence (German):License LogoEs gilt das UrhG