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Low interest rates push banks to increase credit risk – BoE and IMF

  • 23/03/2018
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Low interest rates push banks to increase credit risk – BoE and IMF
Long periods of low interest rates could force banks to increase their credit risk in the search for profits, according to monetary policymakers and the International Monetary Fund (IMF).


Banks benefit from low rates in the short-term but in the longer term it dents their profitability, the Bank of England, Hong Kong Monetary authority and the IMF said in a roundtable discussion on policies in a post-financial crisis world.

The Bank of England base rate has not been above 0.5% for almost 10 years.

Persistent low interest rates can have different impacts on the financial sector over time, policymakers said at the roundtable.

It was also noted that the subsequent uncertainty on asset fundamental values can in turn give rise to booms and busts through mis-pricing.

Low rates are thought to have helped house prices in parts of Britain, notably London, reach record highs since the financial crisis.


Banks search for yield

A report on the roundtable discussion said: “Most participants agreed that low rates were likely to benefit banks in the short term, but hurt them if they persisted for a long period.

“It was argued that if interest rates remained low for long, the early benefits of low interest rates on net interest rate margins might become outweighed by vulnerabilities related to profitability pressures in the longer run.

“This could force banks to rely on a search for yield and consequently increase credit risk.”

Participants also considered that long-term low rates could create disruption and market distortion by encouraging financial companies to change their business model only to have to change them again when policies went back to normal.

The Bank of England is expected to lift the base rate to 0.75% in May – its highest level since March 2009 – with the possibility of further hikes later this year.

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