Saturday , December 14 2019
Home / Bank of International Settlement / Bank intermediation activity in a low interest rate environment

Bank intermediation activity in a low interest rate environment

Summary:
BIS Working Papers  |  No 807  |  30 August 2019 by  Michael Brei, Claudio Borio and Leonardo Gambacorta PDF full text (624kb)  |  31 pages Focus This paper examines how the long period of low interest rates has affected the business activities of banks. Contribution The new findings draw on data for 113 large international banks headquartered in 14 major advanced economies for the period 1994-2015. The analysis distinguishes between three types of effect on banks from short-term interest rates - on their income, balance sheets and risk exposures. It weighs the possibility of

Topics:
International Settlement considers the following as important:

This could be interesting, too:

Cash writes Negativzinsen ab dem ersten Franken?

Von Daniel Hügli writes Fritz Zurbrügg – «Wir machen nicht Geldpolitik für irgendwelche Sektoren»

International Settlement writes The currency composition of foreign exchange reserves

New York Fed writes Tariffs, Auto Loans, Rising College Costs, and Other Top LSE Posts of 2019

BIS Working Papers  |  No 807  | 
30 August 2019
PDF full text
 (624kb)
 |  31 pages

Focus

This paper examines how the long period of low interest rates has affected the business activities of banks.

Contribution

The new findings draw on data for 113 large international banks headquartered in 14 major advanced economies for the period 1994-2015. The analysis distinguishes between three types of effect on banks from short-term interest rates - on their income, balance sheets and risk exposures. It weighs the possibility of effects that vary with the level of rates. It also filters out the influence of macroeconomic, regulatory and bank-specific factors.

Findings

Low interest rates have prompted banks to shift from interest-generating to fee-generating and trading activities. This has partially offset the fall in banks' returns on lending ("interest margin"). The shift is stronger for low capitalised banks. Banks have also made moderate changes in the way they fund themselves, preferring deposits over short-term borrowing. In addition, they have responded to new regulation by reducing the riskiness of their assets. At the same time, provisions against losses on lending have fallen, which may indicate that potential problem loans are being repeatedly rolled over ("evergreening").


Abstract

This paper investigates how the prolonged period of low interest rates affects bank intermediation activity. We use data for 113 large international banks headquartered in 14 major advanced economies during the period 1994-2015. We find that low interest rates induce banks to shift their activities from interest-generating to fee-related and trading activities. This rebalancing is stronger for low capitalised banks.Banks also moderately adjust their funding structure, away from short-term market funding towards deposits. We observe a concomitant decline in the risk-weighted asset ratio and a reduction in loan-loss provisions, which is consistent with signs of evergreening.

JEL codes: C53, E43, E52, G21

Keywords: monetary policy, bank business models, financial crisis

International Settlement
The Bank for International Settlements (BIS) is an international company limited by shares owned by central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work through subcommittees, the secretariats it hosts and through an annual general meeting of all member banks. It also provides banking services, but only to central banks and other international organizations. It is based in Basel, Switzerland, with representative offices in Hong Kong and Mexico City.

Leave a Reply

Your email address will not be published. Required fields are marked *