The Impact of Changing Interest Rates on Swedish Bank Profitability: Evidence from the Pre-, During-, and Post-COVID-19Period (2014–2024)

Sammanfattning

This thesis examines how changes in central bank policy rates (PolicyRateChange) affectthe profitability of Sweden's five largest banks across three distinct economic phases: prepandemic (2014Q1 – 2019Q4), pandemic (2020Q1 – 2021Q2), and post-pandemictightening (2021Q3 – 2024Q4) While prior research often focuses on sustained interestrate levels, this thesis centers on the dynamic, quarter-on-quarter impact of rate changesand their interaction with macroeconomic conditions and bank characteristics. Using Panel Fixed Effects models with Driscoll-Kraay standard errors and quarterly data,the analysis finds that the impact of PolicyRateChange is highly phase-dependent. Duringthe pandemic, rate changes had a large and negative association with ROA and ROE(though statistical significance is difficult to reliably ascertain due to data limitations),while in other periods the linear effects appeared negligible. Importantly, Net InterestMargin (NIM) demonstrates a statistically robust cubic response to policy rate changes,revealing a complex, non-linear relationship that challenges conventional assumptionsabout the monetary policy transmission mechanism. This finding suggests that themarginal impact of a rate adjustment on interest spreads depends significantly on themagnitude of the change itself, with potential implications for policy implementation and bank strategy. Operational efficiency (CostIncomeRatio) and inflation emerge as consistent, significantprofitability drivers across models. However, severe econometric challenges includingstrong positive serial autocorrelation, multicollinearity in interaction models, and a verysmall number of bank clusters (N=5) severely limit the reliability of statistical inferencefor individual coefficients. As a result, extreme caution is warranted when interpretingreported p-values or drawing causal conclusions about the direct impact ofPolicyRateChange and especially moderating effects. Despite these constraints, this thesis offers a context-specific, dynamic view of monetarypolicy transmission in Sweden's concentrated banking sector. The findings highlight thenon-linear (for NIM) and regime-contingent nature of interest rate impacts, contributingto a more nuanced understanding of profitability under evolving macro-financialconditions while underscoring critical methodological challenges.