Market Interest Rates and Commercial Bank Profitability: An Empirical Investigation

Authors

  • MARK J. FLANNERY

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    • I would like to thank Richard Startz, my Federal Reserve Bank colleagues, and members of the Finance Workshop at Northwestern University for comments and suggestions. Carole Moeller provided abundant and cheerful research assistance throughout. Early financial support from the Rodney L. White Center for Financial Research is gratefully acknowledged.
    • University of Pennsylvania and Federal Reserve Bank of Philadelphia

ABSTRACT

The widespread notion that commercial banks “borrow short and lend long” implies that sharp market interest rate increases may induce a significant number of banking failures. This paper develops a method for estimating average asset and liability maturities for a sample of large money center banks. Regression models are tested to determine if market rate fluctuations have a significant impact on bank profitability. The conclusion is negative: large banks have effectively hedged themselves against market rate risk by assembling asset and liability portfolios with similar average maturities.

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