Banking in a Steady State of Low Growth and Interest Rates

By Qianying Chen, Mitsuru Katagiri, Jay Surti

August 27, 2018

Preview Citation

Format: Chicago

Qianying Chen, Mitsuru Katagiri, and Jay Surti. Banking in a Steady State of Low Growth and Interest Rates, (USA: International Monetary Fund, 2018) accessed December 22, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.To the extent that such an economic 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.

Subject: 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

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/192
Stock No:

WPIEA2018192
ISBN:

9781484373873
ISSN:

1018-5941

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