Low Interest Rates and Bank’s Profitability – Update May 2019

Low Interest Rates and Bank’s Profitability – Update May 2019

My last post on this important topic was in 2017.  Since then several new articles and research papers have been published. I have compiled them in this post.  Please see references.

In my posts I have shown how many trends in economics for the last thirty years can be explained by unintendend consequences of US Federal Researve monetary policy of lowering interest rates to boost economic growth.

  • Rise of Shadow Banking – MMMF
  • Rise of International capital flows in USA
  • Growth of Consumer credit – Credit Cards and Housing Loans
  • Decline in Net Interest Margins of the Banks
  • Risk taking by banks to maintain and increase their profits
  • Rise of Non interest income of Banks
  • Rise of Non core business of banks
  • Rise of Mergers/Acquisitions/Consolidation in Banking sector

Related to these are:

  • Business Investments by Production side of economy
  • Increase in Market concentration of Products
  • Increase in Mergers and Acquisitions/consolidation among Product market businesses
  • Decreasing monitory policy effectiveness
  • Wrong economic growth forecasts
  • Secular Stagnation Hypothesis
  • Rise of Outsourcing and global value chains
  • Free Trade agreements
  • Increase in Ineqality of wealth and Income
  • Increase in corporate profits and equities market
  • Increase in corporate savings
  • Increase in share buybacks, and dividends payouts

 

 

and this one,

Increasing Market Concentration in USA: Update April 2019

Key Sources of Research:

Monetary policy and bank profitability in a low interest rate environment

Click to access ecb-wp2105.en.pdf

The “Reversal Interest Rate”: An Effective Lower Bound on Monetary Policy∗

Markus K. Brunnermeier and Yann Koby

This version: May 3, 2017

Click to access 16f_reversalrate.pdf

Click to access 26d_rir_bankofcanada.pdf

Interest Rate and Its Effect on Bank’s Profitability

Muhammad Faizan Malik1,2, Shehzad Khan1,2, Muhammad Ibrahim Khan1, Faisal Khan

https://www.researchgate.net/publication/318648785_Interest_Rate_and_Its_Effect_on_Bank’s_Profitability

Bank performance under negative interest rates

VOXEU

https://voxeu.org/article/bank-performance-under-negative-interest-rates

How low interest rates impact bank

BBVA

https://www.bbva.com/en/how-low-interest-rates-impact-bank-profitability/

Negative-nominal-interest-rates-and-banking

Money and Banking

https://www.moneyandbanking.com/commentary/2018/10/21/negative-nominal-interest-rates-and-banking

Monetary policy and bank equity values in a time of low interest rates

Miguel Ampudia, Skander Van den Heuvel

 

Click to access ecb.wp2199.en.pdf

 

Bank Profitability and Financial Stability

Prepared by TengTeng Xu, Kun Hu, and Udaibir S. Das1

IMF

January 2019

 

https://www.imf.org/~/media/Files/Publications/WP/2019/wp1905.ashx

 

Financial stability implications of a prolonged period of low interest rates

Report submitted by a Working Group established by the Committee on the Global Financial System

The Group was co-chaired by Ulrich Bindseil (European Central Bank) and Steven B Kamin (Board of Governors of the Federal Reserve System)

July 2018

 

Click to access cgfs61.pdf

 

Monetary policy and bank profitability in a low interest rate environment

Carlo Altavilla Miguel Boucinha José-Luis Peydró
Economic Policy, Volume 33, Issue 96, October 2018, Pages 531–586,
Published: 09 October 2018

 

https://academic.oup.com/economicpolicy/article/33/96/531/5124289

 

 

Determinants of bank profitability in emerging markets

by E. Kohlscheen, A. Murcia and J. Contreras

Monetary and Economic Department

January 2018

BIS

Click to access work686.pdf

 

 

 

The Risk-Taking Channel of Monetary Policy Transmission in the Euro Area

 

Matthias Neuenkirch, Matthias Nöckel

4/2018

 

Click to access cesifo1_wp6982.pdf

 

 

 

 

ADAPTING LENDING POLICIES WHEN NEGATIVE INTEREST RATES HIT BANKS’ PROFITS

Óscar Arce, Miguel García-Posada, Sergio Mayordomo and Steven Ongena

2018

Click to access dt1832e.pdf

 

 

Banks, Money and the Zero Lower Bound

Michael Kumhof

Xuan Wang

Click to access 2018-16.pdf

 

 

 

Banking in a Steady State of Low Growth and Interest Rates

by Qianying Chen, Mitsuru Katagiri, and Jay Surti

IMF

https://www.imf.org/~/media/Files/Publications/WP/2018/wp18192.ashx

 

 

 

Changes in Monetary Policy and Banks’ Net Interest Margins: A Comparison across Four Tightening Episodes

Jared Berry, Felicia Ionescu, Robert Kurtzman, and Rebecca Zarutskie

Federal Reserve

2019

https://www.federalreserve.gov/econres/notes/feds-notes/changes-in-monetary-policy-and-banks-net-interest-margins-a-comparison-20190419.htm

 

 

 

Monetary Policy and Bank Profitability, 1870 – 2015

47 Pages Posted: 8 Feb 2019

Kaspar Zimmermann

University of Bonn

Date Written: January 25, 2019

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3322331

 

 

The effect of falling interest rates and yield curve to banks’ interest margin and profitability: cross-country evidence from the EU banks in the aftermath of 2008 financial crisis

Giorgi Chagoshvili

MS Thesis

 

https://repository.ihu.edu.gr/xmlui/bitstream/handle/11544/29306/The%20effect%20of%20falling%20interest%20rates%20and%20yield%20curve%20to%20banks%20%20interest%20margin%20and%20profitability%20cross%20country%20evidence%20from%20the%20EU%20banks%20in%20the%20aftermath%20of%202008%20financial%20crisis.pdf?sequence=1

 

 

 

 

Bank Performance under Negative Interest Rates

 

by Jose A. Lopez, Andrew K. Rose, and Mark M. Spiegel

 

Click to access VOXNNIR.pdf

Determinants of bank’s interest margin in the aftermath of the crisis: the effect of interest rates and the yield curve slope

  • Paula Cruz-García
  • Juan Fernández de GuevaraEmail author
  • Joaquín Maudos

https://link.springer.com/article/10.1007/s00181-017-1360-0

 

 

 

 

Key Determinants of Net Interest Margin of Banks in the EU and the US

MS Thesis

Charles University

Bc. Petr Hanzlík

 

https://dspace.cuni.cz/bitstream/handle/20.500.11956/99546/120297262.pdf?sequence=1

 

HP’s Megatrends

HP’s Megatrends

 

Since 2018, HP has started publishing a report titled Megatrends.  In this report global macro changes are presented.

Macro Forces

  • Socio Economic
  • Demographic
  • Technological

 

There is so much change happening around us today. How we live, work and play in both developed and developing countries will look very different in the next ten to thirty years. Underlying this change are key trends, many having disruptive implications for people and businesses, including HP. It is vitally important that we do our best to discern what the future may look like, developing our own point-of-view on potential future states and their implications, in terms of threats and opportunities. Understanding Megatrends gives us the ability to frame and make more informed, strategic long-term decisions and avoid surprises we could have anticipated and even exploited.

Megatrends are those global socio-economic, demographic and technological forces that we think will have a sustained, transformative impact on the world in the years ahead. On businesses, societies, economies, cultures and our personal lives. Our objective with Megatrends is to directionally point to where the world is going, the potential future states that may result, and then to frame implications in terms of threats and opportunities for Customers and HP. We use Megatrends work to help inform our long-term strategic planning thinking and to support Customer and HP thought leadership and communications with employees, customers, partners and market influencers around technology Vision for the future.

We have identified four major Megatrends and a wide range of underlying sub-trends. We cover each Megatrend and an illustrative set of the sub-trends in this paper.

  • Rapid Urbanization
  • Changing Demographics
  • Hyper Globalization
  • Accelerated Innovation

 

megatrendsmegatrends2

 

Technological Changes

As we move farther into the 21st Century, we see new technologies converging that, together, will generate the same kind of growth. In the process, they will change how the entire world makes, sells and lives.

  • –  BioConvergence: The science of Biology in combination with compute is accelerating. Over the next two decades, the way we make things will change radically. We are seeing the radical acceleration of biology as AI changes how analysis is done and robotics/sensors increase the speed and precision of testing.
  • –  Beyond Human: New sensors and interfaces change the nature of human computer interaction. Over the next decade, the way we do work will be reinvented as computation integrates itself seamlessly into the biological processes of our bodies and cognitive processes of our minds. We are already starting to see the early glimmer of this in wearable sensors, in pace makers, and in voice assistants.
  • Frictionless Business: Technology is changing the size and speed at which transaction and coordination are possible in business processes and markets. In the next ten years, the way business is transacted and coordinated will likely change tremendously. Business processes are being reinvented by concurrent innovation in AI, IoT, Blockchain and applications that automate and create smart- streamlined activities managed by software instead of humans. Markets are also being reinvented when these technologies are used in a distributed (vs. centralized) fashion along with innovative business models.

 

This year’s report [what’s new]
The 2019 HP Megatrends Report explores global, regional and metro income trends, urbanization’s impact on these trends, the resulting rise of new metro-based economic powerhouses, and the role of automation and education in meeting labor market challenges driving changing demographics and growing economies. Additional research explores how increasing incomes are putting a strain on our energy resources and what role technologies such as 3D printing, Software 2.0 and Edge Computing could play in helping to drive to greater efficiencies benefiting customers, industries, and the planet.

megatrends3

Please see my related posts

Strategy | Strategic Management | Strategic Planning | Strategic Thinking

 

Key Sources of Research

 

Megatrends: Shaping the Future

Implications for people and businesses

June 2018

HP

 

Click to access 4AA7-3480ENW.pdf

 

 

MEGATRENDS: PREDICTING THE FUTURE TO REINVENT TODAY

Shane Wall

HP CTO and Global Head of HP Labs

January 25, 2018

 

Click to access 20180125-Megatrends-predicting-the-future-to-reinvent-today.PDF

 

 

Megatrends 2019

HP

https://hpmegatrends.com/megatrends-2019-2eae2fc27ebe

 

LSE Event : Megatrends by Shane Wall

London School of Economics and Political Science

 

 

HP CTO Shane Wall interview — Megatrends, automating jobs, and fighting growing inequality

HP CTO Shane Wall interview — Megatrends, automating jobs, and fighting growing inequality