The effects of low and negative interest rates on the banking sector

Abstract

After the subprime mortgage financial crisis of 2007-2008, that adversely affected economies globally, policy makers had to react in order to bring about the time enjoyed prior to this period. One way to achieve this was for central banks to intervene and adopt an expansionary monetary policy in order to stimulate world economies. This intervention resulted in low, and even negative, interest rates being adopted. One such economy to experience such rates was the Euro zone, where in June 2014 the European Central Bank set the deposit facility rate below zero. There has been much discussion surrounding the record low interest rates and whether the negative interest rates affect banks’ profitability. Consequently, the main aim of this dissertation is to analyse this perceived relationship by conducting an empirical analysis on banks’ profitability from 2009 till 2017. In this study, Banks’ profitability is to be analysed by assessing the effects on; loan and deposit rates, loan growth, Return on Equity and Net interest income. This study is to be carried out on a selected group of countries which are: The Euro Area, Germany, Netherlands, Spain, Malta and Sweden. Utilising questionnaires and an analysis of the bank’s financial statements will allow for a qualitative approach to be adopted in order to assess the bank’s performance over this low interest rate period. Results from the study suggests that banks’ interest rates are falling disproportionally, where interest rates on new loans are falling at a higher rate than deposit rates, suggesting that as a result one of the bank’s main profit margin is being adversely affected. Moreover, lending growth has been on the rise especially after the introduction of further stimulus by central banks. It was also found that a number of banks’ Return on Equity and Net interest income has fallen during this period, suggesting that an effect was present.