Monetary Policy and Bank Profitability in Germany: Evidence From a Disaggregated Bank-Level Panel

Abstract

This paper analyses the interplay between monetary policy and bank profitability in Germany using a novel disaggregated panel dataset of over 2,700 banks from the Deutsche Bundesbank spanning 1999 to 2021. Employing fixed-effects panel regressions, the analysis identifies a regime-dependent and asymmetric impact of interest rate dynamics on bank profitability, measured by return on assets (ROA). Specifically, in the pre-2016 period, low short-term interest rates were associated with declining profitability. However, in the post-2016 environment, after the European Central Bank’s Main Refinancing Operations rate reached zero, both the short-term interest rate as well as the slope of the yield curve exhibited a positive and significant effect on ROA. These findings suggest that the effectiveness and transmission of monetary policy evolve in low-rate regimes, consistent with the reversal rate hypothesis. The study offers new empirical evidence on how monetary conditions interact with bank-specific characteristics in a structurally diverse banking sector, with implications for monetary policy design in low-for-long environments.