Quantified impact of market interest rates on commercial banks’ business mix

Abstract

The main aim of this paper is to measure the influence of market interest rate on commercial banks’ business mix. The global character of banking business and the conditions of the world economy have caused extremely low interest rates at the loan and mortgage market in Czech Republic. Low interest rates generate cheaper money and make loans and mortgages easily available since 2014 where the mortgage interest rate dropped below the level of 2.5%. The first aim of this research is to evaluate the effect from different types of interest rates on two types of loan products in this five-year period (2014–2018). The second aim of this research is to analyse the effect from the selected interest rates in Czech Republic on profitability of the selected commercial banks. Lastly, profitability behaviour of the banking sector in Czech Republic and its relation with the selected interest rates and bank-specific determinants has been examined. Our final results state that the consumption interest rate, mortgage interest rate, deposit interest rate, PRIBOR 2w-repo, inflation rate, disposable income, unemployment, GDP and the real effective exchange rate (REER) have significant influence on the volume of mortgage loans and consumer loans too. The authors find that banks´ ROE is affected by profit margin and liquidity, but it is negatively related to financial leverage and the number of provided loans. Lastly, the consumer loan volume has a negative influence on the return on equity. The results show the positive relationship between ROE and mortgage loan volume but negative effect of consumer loan volume on the return on equity.

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