<p>I think the main reason for concern is that bank profitability is impacted if they cannot pass along negative interest rates to depositors.  If you look at the example of Europe, banks have not been able to pay negative interest rates to consumers despite ECB policy rate being negative.  Indeed, the ECB has been forced to implement cheap loans to banks (TLTROs) to help boost bank profitability.  Given the huge sums of money involved this effect can be material even for modestly negative interest rates.  For example 50bp on the whole deposit base of a bank.</p>

CC BY-SA 4.0
2021-01-26T20:03:36.793Z
Why haven't banks been able to pay negative interest rates to consumers? Have they tried?
Criticize SE actions means ban
CC BY-SA 4.0
2021-01-27T11:11:01.993Z
It’s politically unpopular.  They have tried (and succeeded ) in passing along negative rates to institutional , corporate and some high net worth depositors, but mostly not consumer accounts.
dm63
CC BY-SA 4.0
2022-01-26T09:19:55.273Z
Banks actually do pass negative interest rate cost to depositors. Letters are sent to customers in Europe warning they'll charge 0.5% on deposits above EUR100K.
DKK
CC BY-SA 4.0
2020-12-27T13:37:18.003Z
2020-12-27T13:37:18.003Z
dm63
<p>Unless someone can get a bank analyst to weigh in, it will be hard to get a definitive answer on this one.</p>
<p>The first thing to keep in mind is that bank regulations and hedging practices are radically different now than in the pre-1994 era. The Savings and Loan industry was compromised by the Volcker shock (early 1980s), and many people base their views on that episode. However, regulatory practices were overhauled to prevent a repeat.</p>
<p>In any developed country, bank regulators monitor the interest rate risks of banks, as do the banks themselves. Expecting interest rates to rise has been a consensus view for decades, and bankers were not outside that consensus. If the interest rate risk is (largely) hedged, then yes, bank earnings are largely insulated from interest rate movements.</p>
<p>Some people look at yield curve slopes, and claim that they are important for bank earnings. However, they are often working with pre-1994 models. If interest rate risks are roughly hedged, then the effect of the slope is minor.</p>
<p>The general absence of banks facing difficulties during the few interest rate rises are evidence that the regulators are doing what they say they are doing.</p>
<p>One can argue that deposits paying 0% are no longer cheap sources of funding, but this would likely only be material if interest rates were very negative. Banks generate fees off those deposit accounts, which offsets this drag.</p>

CC BY-SA 4.0
2020-08-28T19:45:17.823Z
2020-08-28T19:45:17.823Z
Brian Romanchuk
<p>A lot of Banks are focused on bread and butter lending to small businesses and consumers. Many of those are putting aside provisions for loan losses in the wake of the Covid-19 pandemic. Headlines point to the drastic impact of lower rates on banks.</p>
<p>Conventional lenders make their money on the difference between the interest they pay out to depositors and the interest they earn on loans and investments, as rates rise, the gap widens, but how/why?</p>
<p>Assuming banks lend at certain rate + spread/margin,  are they not supposed to hedge the rate move (E.g. with interest rate swaps or derivatives) ?</p>
<p>How does interest rate impact the private equity sector?</p>

CC BY-SA 4.0
2020-08-28T17:53:27.080Z
Who sold them the interest rate swaps or derivatives?
Criticize SE actions means ban
CC BY-SA 4.0
2020-08-28T17:54:54.297Z
If you receive sight deposits with no interest (e.g. current/checking accounts), then your margin falls with interest rates. Or if for example you used to lend at the central bank rate +1% and take deposits at the central bank rate -1% then you might have have issues with sustaining this when the central bank rate is below 1%.
Henry
CC BY-SA 4.0
2021-09-23T16:20:39.473Z
Loan losses as a result of Covid (restrictions) have little to do with margins. Many banks have been struggling with profitability since the financial crisis because of low rates and increasing competition from new players.
BrsG
<interest-rate><banking>
How do low interest rates negatively impact bank earnings?
DKK
# How do low interest rates negatively impact bank earnings?

(Asked by: username_0 on 2020-08-28)

A lot of Banks are focused on bread and butter lending to small businesses and consumers. Many of those are putting aside provisions for loan losses in the wake of the Covid-19 pandemic. Headlines point to the drastic impact of lower rates on banks.

Conventional lenders make their money on the difference between the interest they pay out to depositors and the interest they earn on loans and investments, as rates rise, the gap widens, but how/why?

Assuming banks lend at certain rate + spread/margin, are they not supposed to hedge the rate move (E.g. with interest rate swaps or derivatives) ?

How does interest rate impact the private equity sector?

**Tags:** interest-rate, banking
> **Comments:**
> **username_1**: Who sold them the interest rate swaps or derivatives?  
> **username_2**: If you receive sight deposits with no interest (e.g. current/checking accounts), then your margin falls with interest rates. Or if for example you used to lend at the central bank rate +1% and take deposits at the central bank rate -1% then you might have have issues with sustaining this when the central bank rate is below 1%.  
> **username_3**: Loan losses as a result of Covid (restrictions) have little to do with margins. Many banks have been struggling with profitability since the financial crisis because of low rates and increasing competition from new players.  

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## 2 answers

### Answer by username_4 on 2020-12-27. Score: 0

I think the main reason for concern is that bank profitability is impacted if they cannot pass along negative interest rates to depositors. If you look at the example of Europe, banks have not been able to pay negative interest rates to consumers despite ECB policy rate being negative. Indeed, the ECB has been forced to implement cheap loans to banks (TLTROs) to help boost bank profitability. Given the huge sums of money involved this effect can be material even for modestly negative interest rates. For example 50bp on the whole deposit base of a bank.

> **Comments:**
> **username_1**: Why haven't banks been able to pay negative interest rates to consumers? Have they tried?  
> **username_4**: It’s politically unpopular.  They have tried (and succeeded ) in passing along negative rates to institutional , corporate and some high net worth depositors, but mostly not consumer accounts.  
> **username_0**: Banks actually do pass negative interest rate cost to depositors. Letters are sent to customers in Europe warning they'll charge 0.5% on deposits above EUR100K.  

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### Answer by username_5 on 2020-08-28. Score: 0

Unless someone can get a bank analyst to weigh in, it will be hard to get a definitive answer on this one.

The first thing to keep in mind is that bank regulations and hedging practices are radically different now than in the pre-1994 era. The Savings and Loan industry was compromised by the Volcker shock (early 1980s), and many people base their views on that episode. However, regulatory practices were overhauled to prevent a repeat.

In any developed country, bank regulators monitor the interest rate risks of banks, as do the banks themselves. Expecting interest rates to rise has been a consensus view for decades, and bankers were not outside that consensus. If the interest rate risk is (largely) hedged, then yes, bank earnings are largely insulated from interest rate movements.

Some people look at yield curve slopes, and claim that they are important for bank earnings. However, they are often working with pre-1994 models. If interest rate risks are roughly hedged, then the effect of the slope is minor.

The general absence of banks facing difficulties during the few interest rate rises are evidence that the regulators are doing what they say they are doing.

One can argue that deposits paying 0% are no longer cheap sources of funding, but this would likely only be material if interest rates were very negative. Banks generate fees off those deposit accounts, which offsets this drag.


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