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Banking in a Steady State of Low Growth and Interest Rates

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  • Qianying Chen
  • Mitsuru Katagiri
  • Jay Surti

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.

Suggested Citation

  • Qianying Chen & Mitsuru Katagiri & Jay Surti, 2018. "Banking in a Steady State of Low Growth and Interest Rates," IMF Working Papers 2018/192, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2018/192
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    References listed on IDEAS

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    Cited by:

    1. Chen, Qianying & Katagiri, Mitsuru & Surti, Jay, 2022. "Monetary surprises and bank equity valuation with prolonged low interest rates," Finance Research Letters, Elsevier, vol. 47(PA).
    2. Junttila, Juha & Perttunen, Jukka & Raatikainen, Juhani, 2021. "Keep the faith in banking: New evidence for the effects of negative interest rates based on the case of Finnish cooperative banks," International Review of Financial Analysis, Elsevier, vol. 75(C).
    3. Junttila, Juha & Nguyen, Vo Cao Sang, 2022. "Impacts of sovereign risk premium on bank profitability: Evidence from euro area," International Review of Financial Analysis, Elsevier, vol. 81(C).

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