Implications of low and negative interest rates on bank profitability and the stock market

Abstract

After 2007-2008 financial crises all economies were affected globally, this meant that a policy was required to counteract to this and try to aid the economy. Central banks therefore intervened through a monetary policy expansion. This policy is meant to stimulate the economy, but it can also go wrong. In this case the policy resulted into low or negative interest rates for a long time, such that it became a problem across many countries including the Euro zone. Seeing as how it has affected number of countries there was concern regarding the impact low or negative interest rates might have on bank’s profitability. The aim is to establish just that throughout the dissertation whereby there is a thorough explanation and analysis on why it should affect the bank’s profitability. Then through empirical evidence conducted, we have tested the stock market against variables such as interest rates, inflation and GDP amongst others. This will show the correlation and impact on the stock market which reflect the economic changes in the country in question. Throughout the research carried out we are able to identify the impact of low interest rates on bank profitability and the risks faced by these financial institutions. This is necessary as we analyse the consequences behind the monetary policy works and the effect it brought about for financial intermediaries. Through the empirical work we have obtained results to sustain this and interest rates were statistically significant and therefore, caused an effect on the stock market. Other variables were also regressed as opposed to the stock market in order to observe their relation and effect