Interest rates, the yield curve and bank profitability in an emerging market economy

Abstract

Abstract We investigate how the level of the short-term interest rate and the slope of the yield curve affect bank profitability in an emerging market economy using a dynamic panel model for the period 2002–2014. The estimation results suggest that while the short-term interest rate and the slope of the yield curve have a negative and significant impact on profits in the short run, the effects of these variables turn out to be positive in the long run, as expected. Hence, our findings indicate that monetary policy significantly influences bank profits in Turkey. The results also emphasize that bank profits in an emerging market exhibit much more sensitivity to interest rates than bank profits in an advanced economy such as the UK.