Do Low Interest Rates Really Penalise The Financial Sector That Much?

zero ratesInterest rates have been at a record low for long

Are extremely low interest rates good or bad for the economy? Is is it true that they are seriously damaging the profitability of the banks and insurers? The debate over the suitability of the zero interest policy driven by the central banks is heating up between the monetary authorities and the financial sector. Both parties defend their opposing positions.

The banks and the insurance companies have beenbitterly  complaining for a long time about the damage negative interest rates is wreaking on their bottom line, but the IMF and the ECB outrightly reject this idea and assure that what is needed is for the banks to implement in-depth reforms to gain efficiency and cut costs.

The governor of the Bank of Sweden, Stefan Ingves, has also entered the debate, playing down the “drama” of low rates, in an interview in the Financial Times. In his view, rates below 0.5% have caused very few problems for the banks in his country, but they have been a great help for the economy’s recovery.

BBVA chairman, Francisco González, made a public statement which had a huge effect on low interest rates: “They are killing us.” ECB head, Mario Draghi, doesn’t share the view. Asked about Deutsche Bank’s problems, he said: “Some banks have problems which have nothing to do with low interest rates, but mainly more with their business models or risk management.”

The ratings agencies have also got involved in the polemic, and not exactly taking sides with the banks. “Low interest rates have had both positive and negative effects for the banking sector, but there have been many more positive effects than negative ones up to now,” says Scope, the German risks rating agency in its latest report.

And it highlights some positive aspects of low interest rates for the banks’ business: the increase in public debt prices when the central banks cut rates, which is beneficial for the lenders’ bond portfolios; the reduction in costs both in the case of deposits and wholesale financing; and, finally, a low interest rate environment facilitates an improvement in debtors’ credit quality and reduces the banks’ provisioning requirements.

About the Author

Francisco López
Working for more than 25 years in the world of journalism and communications, Francisco has gained valuable experience at several well-known newspapers such as El Mundo and La Vanguardia. He specialized in economic and financial news before making the leap to the corporate communication sector where he has held several positions: Adviser to the Ministry of Economy, Director of the Bank of Spain’s Communication Department, in addition to his consultancy role at Analistas Financieros Internacionales, where he currently works.