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Monetary Policy and Bank Profitability in a Low 
Interest Rate Environment
*
 
 
 

 
Carlo Altavilla 
Miguel Boucinha 
José-Luis Peydró
European Central Bank 
European Central Bank 
ICREA-UPF, CREI, BGSE 
 
Abstract
We analyse the impact of standard and non-standard monetary policy on bank profitability. We use 
both proprietary and commercial data on individual euro area bank balance-sheets and market 
prices. Our results show that a monetary policy easing – a decrease in short-term interest rates 
and/or a flattening of the yield curve – is not associated with lower bank profits once we control 
for the endogeneity of the policy measures to expected macroeconomic and financial conditions. 
Accommodative monetary conditions asymmetrically affect the main components of bank 
profitability, with a positive impact on loan loss provisions and non-interest income offsetting the 
negative one on net interest income. A protracted period of low monetary rates has a negative 
effect on profits that, however, only materialises after a long time period and is counterbalanced by 
improved macroeconomic conditions. Monetary policy easing surprises during the low interest rate 
period improve bank stock prices and CDS. 
 
JEL: E52, E43, G01, G21, G28. 
Keywords: bank profitability, monetary policy, lower bound, quantitative easing, negative rates. 
* 
This draft is from 2018. We would like to thank Puriya Abbassi, Nuno Alves, Miguel Ampudia, Philippe 
Andrade, António Antunes, Diana Bonfim, Sarah Holton, Yann Koby, Benoit Mojon, Peter Praet, Elena 
Rancoita, Massimo Rostagno, Enrico Sette, Frank Smets, Andrea Tiseno, Skander Van den Heuvel and 
seminar participants at the ECB, National Bank of Belgium, Banque de France, Oesterreichische 
Nationalbank, Universitat Pompeu Fabra, and Bank of Portugal, for their helpful comments and suggestions. 
The opinions in this paper are those of the authors and do not necessarily reflect the views of the European 
Central Bank or the Eurosystem. José-Luis Peydró acknowledges financial support from the Spanish Ministry 
of Economy, Industry and Competitiveness, Grant ECO2015-68136-P and FEDER, UE, and from the 
European Research Council Grant (project 648398). Please address any comments to Carlo Altavilla: 
[e-mail]; Miguel Boucinha: [e-mail]; or José-Luis Peydró: 
[e-mail]. 
This is a pre-copyedited, author-produced version of an article accepted for publication in Economic Policy following peer review. The version of record [Monetary Policy 
and Bank Profitability in a Low Interest Rate Environment’, Carlo Altavilla, Miguel Boucinha and José-Luis Peydró, Economic Policy, October 2018, 33(96): 531-586] is 
available online at: https://academic.oup.com/economicpolicy/article/33/96/531/5124289; DOI: https://doi.org/10.1093/epolic/eiy013

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