Banking in a Steady State of Low Growth and Interest Rates
IMF Working Papers, August 27, 2018
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- Banking in a Steady State of Low Growth and Interest Rates
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Bibliographic details
- Authors: Qianying Chen, Mitsuru Katagiri, Jay Surti
- Published: August 27, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484373873.001
Summary
- A prolonged low-interest-rate environment presents a significant challenge to banks and is likely to entail major changes to their business models over the long-run.
- Lower returns to maturity transformation in the face of flatter yield curves and an inability to offer deposit rates significantly below zero combine to compress bank earnings in this environment.
- Smaller, deposit-funded, less diversified banks are hurt most, increasing consolidation pressures and reach-for-yield incentives, presenting new financial stability challenges.
- If the environment reflects a new, steady-state with lower equilibrium growth driven by population aging and slower productivity growth, lower credit demand is likely to drive banking toward provision of fee-based, utility services.
Key findings and implications
- Earnings compression mechanisms:
- Lower returns to maturity transformation due to flatter yield curves.
- Inability to offer deposit rates significantly below zero.
- Differential impact across banks:
- Smaller, deposit-funded, less diversified banks are most adversely affected.
- These banks face increased consolidation pressures.
- Reach-for-yield incentives rise, creating new financial stability risks.
- Structural economic drivers:
- Population aging and slower productivity growth can produce a lower equilibrium growth steady-state.
- Lower credit demand in such a steady-state shifts banking toward fee-based, utility services.
Policy and strategic considerations
- Banking business model adaptation:
- Move toward fee-based services as credit demand weakens.
- Address consolidation pressures while managing systemic risks from sectoral consolidation.
- Financial stability concerns:
- Monitor and mitigate reach-for-yield behaviors that could amplify risk-taking.
- Pay particular attention to smaller, deposit-funded, less diversified institutions.
Publication and metadata
- Authors: Qianying Chen, Mitsuru Katagiri, Jay Surti
- Date: August 27, 2018
- Series: IMF Working Papers
- Series identifier: Working Paper No. 2018/192
- Pages: 37
- Volume: 2018
- Issue: 192
- DOI: https://doi.org/10.5089/9781484373873.001
- Stock No: WPIEA2018192
- ISBN: 9781484373873
- ISSN: 1018-5941
- Subjects: Bank soundness, Banking, Deposit rates, Financial institutions, Financial sector policy and analysis, Financial services, Market interest rates, Stocks, Zero lower bound
- Keywords: adaptation strategy, balance sheet, bank business, bank characteristic, bank equity, bank leverage, bank NIMs, bank profits, Bank soundness, Banking, bond yield, business line, Deposit rates, economic growth, Global, Growth, interest rate cut, interest rate shock, Interest Rates, Low-for-Long, Market interest rates, market rate, monetary policy, Prolonged Low Interest Rates, rate of interest, Stocks, transaction service, WP, Zero lower bound
IMF Working Paper: "Banking in a Steady State of Low Growth and Interest Rates", August 27, 2018, by Qianying Chen, Mitsuru Katagiri, and Jay Surti.
Content in this bundle
- Banking in a Steady State of Low Growth and Interest Rates, WP/18/192, August 2018