Inflation and Bank Profits: Monetary Policy Trade-offs
Staff Discussion Notes, February 13, 2025
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Bibliographic details
- Authors: Katharina Bergant, Mai Hakamada, Divya Kirti, Rui Mano
- Published: February 13, 2025
- Series: Staff Discussion Notes
- DOI: https://doi.org/10.5089/9798400294723.006
Overview
- The note asks whether bank profits are exposed to inflation given the recent surge in inflation and the resulting sharp monetary tightening.
- Most banks tend to match income and expense exposures, reducing direct vulnerability to inflation and interest rate changes.
- However, differences in risk management practices and business structures create pockets of vulnerability across banks.
Key findings
- 5 percent of banks in Advanced Economies (AE) are vulnerable to changes in inflation and interest rates.
- 8 percent of banks in Emerging Market and Developing Economies (EMDE) are vulnerable to changes in inflation and interest rates.
- 3 percent of AE banks are at least as exposed as Silicon Valley Bank at the onset of its failure.
- 6 percent of EMDE banks are at least as exposed as Silicon Valley Bank at the onset of its failure.
- Losses at individual banks could leave room for wider panics despite needed improvements in bank regulation and supervision and other ex ante measures.
Policy considerations and trade-offs for central banks
- Central banks may need to weigh raising rates to contain inflation against the potential for financial instability stemming from bank losses.
- Strengthening bank regulation and supervision and implementing other ex ante measures are necessary to reduce vulnerability, but may not fully eliminate the risk of contagion from individual bank failures.
Keywords
- Bank profitability
- Financial stability
- Inflation
- Monetary policy
Staff Discussion Notes: "Inflation and Bank Profits: Monetary Policy Trade-offs" by Katharina Bergant, Mai Hakamada, Divya Kirti, and Rui Mano, February 13, 2025.
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- Staff Discussion Note