Monetary surprises and bank equity valuation with prolonged low interest rates

Abstract

Does the ongoing, prolonged low interest rate environment affect how monetary policy surprises impact bank valuation? This paper answers this question by analyzing cross-country behavior of bank equity prices. Our results show that monetary easing surprises, which usually elicit a positive response from bank equity prices, tend to instead induce a negative response during periods of prolonged low interest rates, particularly for banks which rely on domestic deposits. This result implies that equity markets interpret a further interest rate cut in a prolonged low interest rate environment as negative information about future bank profitability.