This study examines the relationship between interest rates and bank profitability, focusing on European banks from 1998 to 2022. While rising interest rates are typically associated with higher profitability, the impact of prolonged low rates remains debated. Some studies, such as Borio et al. (2017) and Claessens et al. (2016), argue that low rates compress Net Interest Margins (NIM) and reduce profitability, while others, like Windsor et al. (2023), suggest that banks have adapted through cost-cutting and diversification. Using a dynamic panel data approach with the Generalized Method of Moments (GMM) estimator, we analyze 149 publicly traded banks across 15 European economies to explore how low interest rates affect bank performance.

Our findings confirm that low interest rates compress NIM, mainly due to the challenges banks face in adjusting loan and deposit rates. However, rather than relying primarily on cost reductions or diversification, we find that interest rate asymmetry, banks’ ability to adjust loan rates faster than deposit rates, plays a critical role in maintaining NIM. Meanwhile, the effects of low interest rates on Return on Assets (ROA) and Return on Equity (ROE) are non-significant, indicating that factors beyond interest rates may have a greater influence on these broader profitability measures. This study contributes to the ongoing discourse by emphasizing the importance of NIM in maintaining bank performance under prolonged low interest rates and provides insights for future research on interest rate management and bank strategy.