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Low interest rates threaten business models of banks

The persistently low level of interest rates could lead to significantly higher lending rates in a few years’ time. This is only seemingly paradoxical: the business model of more and more banks due to the artificially low interest rates could cause negative consequences for the credit market.

The economist Bernd Nolte warned shortly before the turn of the year of a “regional banking crisis” in Germany. According to the financial expert, the low level of interest rates threatens the existence of German savings banks and Colabanks. Due to the low level of interest rates, the core of the bank’s business model – the acquisition of deposits and their transfer in the lending business – is at risk, Nolte warned.

Savings banks and Colabanks under pressure

Savings banks and Colabanks under pressure

On behalf of savings banks and Colabanks, the konom had examined the earnings situation of around 300 institutions. The result: already in the past year, the ratio of expense and income in 35 percent of all regional banks was in a “competitive area”. Nolte expects that as early as 2018, two-thirds of all savings banks and Colabanks would be threatened with their existence, unless they take appropriate action.

If the low level of interest rates continues for some time, the number of providers in the lending business could decline noticeably. Because not only regional banks suffer from low lending rates. With interest rates of 4-5 percent and a loan default rate of around 3 percent in relation to the German loan market as a whole, margins in this segment are too low for many other institutions.

With fewer providers, the profit increase increases

With fewer providers, the profit increase increases

If suppliers leave the market, the market volume spreads to fewer suppliers, which could lead to a moderate expansion of margins as a result of the company fixed-cost degression. However, structurally higher profit increases of the remaining players on the refinancing costs are at least as likely. The lower the number of providers in a market, the higher the ceteris paribus prices (interest rates or profit surcharges on the refinancing costs).

This could partially solve the margin problem of the providers remaining in the market, but that is certainly not the case. The providers who are leaving the market have to look for new business models.

It has been observed for some time now that additional monetary easing by the EB is having less and less impact on the credit market. When negative interest rates were discussed some time ago, experts cautioned against such an experiment in Denmark. There, banks had simply put the cost of interest rates below 0.00 percent on loans.

The EB does not want to be to blame

The EB does not want to be to blame

It follows that the refinancing costs can no longer be lowered. If the refinancing costs can not be reduced, they must rise or remain constant. If they did, the EB would have at least defeated its course of expansion, which is hardly imaginable at present. If the refinancing costs remain constant, some of the providers must disappear from the market so that the margins are sufficient for the others.

The EB always resolutely rejects allegations of possible adverse effects of low interest rates and claims that its monetary policy only influences short-term interest rates. The claim can be easily refuted: their (announced) interventions in the bond market, the yields of German government and bank bonds are too low.


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