Weak instruments in estimating business cycle effects on banks' interest income

摘要

This article explores the link between the real business cycle and core bank earnings. Using bank-level data and an estimation technique which corrects for weak instruments, evidence confirms that pre-provision Net Interest Income (NII) is determined by the term structure of interest rates rather than output fluctuations. Output growth is only found to be significant when Loan-Loss Provisions (LLP) are taken into account.