Macroprudential Policy, Monetary Policy and the Bank Interest Rate Margin

Abstract

Against the background of the policy interest in the interaction of monetary policy and macroprudential policy, we present empirical estimates of effects of macroprudential policies alongside monetary policy on banks’ interest rate margins (net interest income/average assets). This is an important determinant of banks’ profitability and accordingly their ability to accumulate capital, as well as a key aspect of the transmission mechanism of monetary policy. To our knowledge, such an analysis has not been undertaken in the research literature to date. The empirical results for a sample of over 1,300 banks from 15 advanced countries over 2000-13 suggest that the level and difference of interest rates and the yield curve affect the margin, in line with existing work. Meanwhile a number of macroprudential policy measures have an effect on the margin, firstly when they are introduced, secondly in levels and thirdly when leveraged in combination with the level of the interest rate. Some differences are found in the response of small and large banks to macroprudential policy but less so for monetary policy. We contend that these results are of considerable relevance to policymakers and regulators, notably in gauging the overall stance of macroeconomic policy.