Banks' net interest margin and changes in the term structure

Understanding the impact of changing interest rates onto banks' net interest margin is of central importance for various stakeholders. The primary focus lies often on changes in the interest level. However, changes in the steepness are a second driver which also significantly impacts banks' interest business. We model the impact of an interest rate shock on a bank's net interest margin, where this shock consists not only of a level shift, but also of a change in the steepness of the term structure. Our simplified model can replicate stylized features of different bank business models.The outcome of our parsimonious model for a bank's interest business is broadly in line with the results of a quantitative survey among German small and medium-sized banks.