Banking in a Steady State of Low Growth and Interest Rates

Qianying Chen (), Mitsuru Katagiri and Jay Surti

No 2018/192, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; rate of interest; economic growth; balance sheet; bond yield; business line; monetary policy; Banking; Growth; Interest Rates; Low-for-Long; Prolonged Low Interest Rates; bank characteristic; bank equity; adaptation strategy; transaction service; bank NIMs; bank leverage; bank profits; market rate; interest rate cut; bank business; interest rate shock; Deposit rates; Market interest rates; Zero lower bound; Stocks; Bank soundness; Global (search for similar items in EconPapers)
Pages: 37
Date: 2018-08-27
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Citations: View citations in EconPapers (3)

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