BIS published a working paper which examines how the long period of low interest rates has affected the business activities of banks. The findings draw on data for 113 large international banks headquartered in 14 major advanced economies during 1994 to 2015. The analysis distinguishes between three types of effect on banks from short-term interest rates—their income, balance sheet, and risk exposure. The analysis filters out the influence of macroeconomic, regulatory, and bank-specific factors.
The findings indicate that low interest rates induce banks to rebalance their activities from interest-generating to fee-generating and trading activities. Banks seek to offset the reduced interest margin by expanding other income-generating activities. This rebalancing is stronger for capital-constrained banks. On the funding side, banks rely more on deposits and less on short-term market funding. There is also some evidence of a decline in the risk-weighted asset ratio and a reduction in loan-loss provisions. The results indicate that persistent low interest rates tend to reduce bank profits, mainly by depressing interest margins. They indicate that banks adjust their activities in an effort to offset that reduction, at least partially. They suggest that supervisors reinforce these shifts. The results reveal that funding tends to shift form short-term market funding toward deposits and suggest suggest that supervisors should remain alert to the possibility of "evergreening."
Related Link: Working Paper
Keywords: International, Banking, Research, Risk-Weighted Assets, Interest Rate, ALM, Asset and Liability Management, Interest Rate Risk, Business Models, BIS
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