RDP 2023-05: The Impact of Interest Rates on Bank Profitability: A Retrospective Assessment Using New Cross-country Bank-level Data 5. Data Description

The current project is conducted under the auspices of the IBRN, a network of central bank researchers who focus on global banking. To examine the impact of interest rates on banks' profitability, we rely on confidential bank-level data. Each country's data are only available to subject matter experts from that country's central bank and we rely on the expert judgement of each contributor to construct the most appropriate sample for their jurisdiction.

Details of the sample for each country are provided in Table 1. Around 1,500 banks across the 10 jurisdictions are examined, with a bank broadly defined as an institution whose business is to receive deposits and/or close substitutes and grant credits or invest in securities on their own account. Most jurisdictions use data at a quarterly frequency, although some use semiannual and annual data. Seven countries use unconsolidated banking data, with the decision to rely on consolidated versus unconsolidated data left to subject matter experts from each central bank. While most data series start in the early 2000s or earlier, for Sweden they start only in 2010.

Table 2 provides a full list of variables used in our analysis. Unlike previous studies, our definition of a ‘low-rate environment’ is country-specific, defined as the 25th percentile of each country's historical rate distribution. In choosing the most appropriate time period over which to define ‘low’ rates we again rely on our participating subject matter experts, with the sample period not necessarily the same as that shown in Table 1. The low-rate threshold for each central bank is plotted in Figure 1.

Trends in profitability for the mean and median banking systems in the sample are plotted in Figure 2. Despite the broad-based decline in short-term interest rates over the sample, on average across the countries examined in this paper, banks' ROAs were largely unchanged over the sample, although volatile around the financial crisis in 2008. By contrast, the median NIM has been declining over the past decade, consistent with the decline in policy rates. For both the NIM and ROA the median is more volatile than the mean, suggesting there is substantial heterogeneity in country experiences.

For a cursory and preliminary look at the association between changes in interest rates and profitability, Figures 3 and 4 plot the period-to-period change in NIMs and ROAs against the change in interest rates for the mean bank in all countries. There appears to be a positive association between changes in interest rates and banks' NIMs; however, there is no equivalent relationship for banks' ROAs. This preliminary evidence, along with the trends presented in Figure 2, is consistent with the idea that banks' may have shielded the impact of lower rates on overall profitability by increasing fee-based business and reducing costs. This notwithstanding, these bivariate associations fail to control for a host of relevant factors, including country and bank fixed effects as well as other relevant balance sheet controls, motivating our much more careful assessment of these relationships in the next section.