How do different levels of interest rates affect local banks?

Abstract

This dissertation looks at the relationship between interest rates and banks. The analysis and research question are based on how banks are affected when interest rates move up or down. Consideration is made of whether negative interest rates only harm banks or whether they be beneficial for banks in certain areas. Conversely, will positive interest rates always be good for the banking sector or can they reach a limit where they can hurt a bank’s performance? What is the overall relationship of interest rates and banks? Although we are currently (2021) in a low period environment we need to remember that in the past before the financial crisis, interest rates were not this low. We therefore consider how banks operated before the interest decline, how banks reacted to the sudden decline in interest rates, how they are managing in this low interest period, and finally how they will manage if ‘theoretically’, interest rates were to rise again. To answer this research question, we have researched online literature, completed a questionnaire with some of the most experienced individuals within the Maltese banking sector, and finally concluded by linking our literature review and research analysis.