Bericht
Impact of a policy rate cut on bank profitability and financial stability
Concerns prevail that a policy rate cut could weaken bank profitability and trigger financial instability. However, banks can sustain relatively high net interest margins with little fluctuation despite a rate cut owing to their dominant position in the deposit market and ability to adjust loan maturity. - By virtue of their market dominance, banks set their deposit rates below the base rate by a fixed percentage, and as such, the former falls within a narrower range than the latter. - Because deposit rates are little exposed to base rate fluctuations, banks are able to increase their share of long-term loans which are unaffected by short-term rate changes. This means that lending rates also fall by a smaller margin. - An empirical analysis found that a 1%p change in the call rate, which moves in line with the base rate, adjusts the deposit and lending rates by 0.53%p and 0.58%p, respectively, indicating that the fluctuation (0.05%p) in the net interest margin is statistically insignificant. Therefore, the possibility of financial instability due to a deterioration in bank profitability on a rate cut by the central bank should not be deemed as a constraint.
- Language
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Englisch
- Bibliographic citation
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Series: KDI Policy Forum ; No. 280
- Classification
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Wirtschaft
- Event
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Geistige Schöpfung
- (who)
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Hwang, Sunjoo
- Event
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Veröffentlichung
- (who)
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Korea Development Institute (KDI)
- (where)
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Sejong
- (when)
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2020
- DOI
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doi:10.22740/kdi.forum.e.2020.280
- Handle
- Last update
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10.03.2025, 11:45 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Bericht
Associated
- Hwang, Sunjoo
- Korea Development Institute (KDI)
Time of origin
- 2020