This paper deals with the problems of banks in the low rate interest environment due to the monetary policy of the European Central Bank, with focus on bank earnings. Furthermore it includes a brief investigation of the interaction between low interest rates and increased regulation. Firstly, the impacts of the low interest rate policy on the banks are discussed. The next section describes the interaction between low interest rates and increasing regulation. A brief analysis examines whether monetary policy increases or decreases systemic risk follows. Finally, the main findings of the paper are discussed.
After the financial crisis in 2008, six years later the negative interest rate policy by the ECB was introduced in order to prevent the effects of the recession and to propel economic recovery. Among other effects, the ECB's low interest rates force commercial banks to lower their interest rates on loans, consequently the demand of the customers for credits rises. On the other hand, the investment of saved money bears less interest - the banks do not want to deposit the money of their customers with themselves, in some cases even penalty interests are raised. The aim of the ECB's monetary policy is therefore: more corporate investment through cheap loans and more customer consumption due to unattractive interest rates.
Table of Contents
1. Introduction
2. Low interest rates, bank balance sheets and bank earnings
2.1 Low interest rates and the role of the ECB
2.2 Bank Earnings with a focus on risk-taking
2.3 Bank Balance Sheets and the effects on German banks
2.4 Open issues
3. The interaction between low interest rates and increased regulation
3.1 Regulatory requirements – a stocktaking
3.2 The interaction of regulation and interest rates - or even the double burden
4. Does the ECB overall increase or decrease systemic risk?
5. Conclusion
Objectives and Core Themes
This paper examines the challenges faced by the banking sector due to the European Central Bank's prolonged low-interest-rate policy, specifically analyzing its impact on bank profitability, risk-taking behavior, and the interaction with intensified regulatory requirements.
- The transmission mechanism of the ECB's low interest rate policy on commercial banks.
- The relationship between low interest margins and increased risk-taking in the banking sector.
- Specific vulnerabilities of German banking institutions compared to foreign competitors.
- The cumulative "double burden" of low interest rates and increased regulatory compliance.
- The broader macroeconomic implications regarding systemic risk.
Excerpt from the Book
The interaction of regulation and interest rates - or even the double burden
Obviously, banks are currently facing some challenges: the low interest rate environment; digitalization; regulation and the shortage of skilled workers. However, what is special at this point, is that some of these challenges interact with each other. At this point, the interaction between low interest rates and rising regulation is discussed.
On the one hand, banks are required to strengthen their capital base, but on the other hand the various regulatory initiatives and the resulting cost burden considerably limit their possibilities for profit retention. Especially for smaller, non-capital-market-oriented banks an expansion of the equity base can essentially only come from profit retention – and these banks have problems generating sufficient profit due to the low interest rates (see Hackethal et al 2015, p. 171).
Principally the savings banks and cooperative banks suffer from this interaction. As already mentioned, they depend on the interest rate business, and are therefore exposed to a double burden, as they need to take care of interest income and meet their regulatory capital requirements and administrative regulatory aspects at the same time. Every customer, every transaction and every account opening must be accurately documented. In fact, it costs the bank money, and the staff time. Valuable time that they could otherwise spend, for instance with acquiring new customers.
Summary of Chapters
1. Introduction: Outlines the negative interest rate policy introduced by the ECB following the 2008 financial crisis and states the paper's focus on the resulting pressures on commercial banks.
2. Low interest rates, bank balance sheets and bank earnings: Explains the role of the ECB in monetary policy and details how low interest rates compress net interest margins, incentivizing banks to take higher risks.
3. The interaction between low interest rates and increased regulation: Examines the regulatory landscape, specifically Basel III, and how it creates a "double burden" for banks struggling with low profitability.
4. Does the ECB overall increase or decrease systemic risk?: Discusses the macroeconomic impact of low interest rates on systemic stability, considering the trade-off between economic support and potential asset price bubbles.
5. Conclusion: Summarizes the findings that all banks are affected by the low-interest-rate environment, with German banks being particularly vulnerable due to their business model and the combined burden of regulation.
Keywords
European Central Bank, ECB, monetary policy, low interest rates, banking sector, commercial banks, net interest margin, risk-taking, Basel III, regulation, systemic risk, bank profitability, German banking, cooperative banks, financial stability.
Frequently Asked Questions
What is the primary focus of this paper?
The paper focuses on the adverse effects of the European Central Bank's low-interest-rate policy on the banking sector, particularly concerning bank earnings and risk-taking behavior.
What are the central themes discussed in the work?
Key themes include the impact of interest rate policy on bank balance sheets, the influence of Basel III regulations, and the specific competitive landscape of the German banking sector.
What is the primary research goal?
The goal is to analyze how the low-interest-rate environment impacts bank stability and behavior and whether this policy contributes to increased systemic risk.
Which scientific method is applied?
The paper utilizes a literature-based analytical approach, reviewing empirical studies and macroeconomic observations to synthesize the relationship between monetary policy and banking sector outcomes.
What is covered in the main section of the paper?
The main sections cover the mechanics of the ECB's monetary policy, the profitability challenges for commercial banks, the regulatory framework, and the assessment of systemic risk.
Which keywords best characterize this research?
The research is characterized by terms such as monetary policy, low interest rates, bank risk-taking, systemic risk, and regulatory burden.
How does the "double burden" affect smaller German banks?
Smaller banks, such as cooperative banks, face a double burden because they rely heavily on interest rate income while simultaneously having to absorb high administrative and capital costs imposed by new regulations.
Does the author conclude that the ECB policy is solely negative?
No, the author acknowledges that low interest rates are intended to support the real economy, but argues that they create significant long-term challenges and pressure for the banking industry.
- Quote paper
- Nele Braun (Author), 2019, Banking-Sector Problems in the Context of Low-Interest Rate Policy of the ECB, Munich, GRIN Verlag, https://www.grin.com/document/505768
