What Is the Impact of a Low Interest Rate Environment on Bank Profitability

Abstract

The economic conditions and low interest rate environment of recent years have been challenging for banks that rely on a wide spread between long- and short-maturity yields to generate earnings. The authors? analysis indicates that a low interest rate environment is associated with decreased profitability for banks, particularly for small institutions. However, the estimated negative effects on bank profits are economically small and are outweighed by the likely positive effects on profits of low interest rates boosting economic activity.