BIS Paper Examines Impact of Low Interest Rates on Bank Activity

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