Interest Rates, Yield Curves, and Bank Profitability: Evidence from the United States Banking Sector
Interest Rates, Yield Curves, and Bank Profitability: Evidence from the United States Banking Sector

Summary/Abstract: This paper investigates the effect of monetary policy on the profitability of US banks from 2004 to 2023, a period that includes the Financial Crisis, a prolonged low-rate environment, and the rate hikes following the COVID-19 pandemic. Using annual data for all US banks, we analyse how the Federal Funds Rate and the yield curve impact net interest income, non-interest income, loan loss provisions, and return on assets with a focus on differences across bank sizes and rate environments. We find that in normal rate environments, increases in the federal funds rate and the yield curve benefit smaller banks but reduce profitability for larger institutions. In low-rate environments, large banks show stronger gains in net interest income, likely due to more diversified funding and asset strategies. The results highlight the importance of accounting for both interest rate regimes and bank size in making and assessing monetary policy.

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