The Influence of Monetary Policy on Bank Profitability : A Study of Scandinavian and Central European Banks

Abstract

In this thesis, we find support for the notion that interest rate hikes improve bank profitability. Our results imply that monetary policy might have had a more profound impact on bank profitability from 2021 onwards compared to the preceding decade. When decomposing bank profitability into its components, our analysis suggests that the effect of interest rates on bank profits comes through strong positive effects on net interest income and muted effects on non-interest income and loan loss provisions. Further, in a comparison of the effects in different countries, our findings indicate that the impact of interest rates on balance-sheet bank profitability might be stronger in Eurozone countries and Sweden than in Norway. Lastly, our estimations signal a potential negative impact of sudden interest rate hikes on Eurozone banks’ stock prices and that sudden interest rate changes might not impact Norwegian and Swedish bank stock prices.