Research - The crux of the matter with deposits: low interest rates squeezing credit institutions’ margins
4th edition – June 2016 - by Christian Drescher, Benedikt Ruprecht, Mark Gründer, Michael Papageorgiou, Eugen Töws and Felix Brinkmann
The protracted low-interest-rate environment will, especially in the medium term, pose an enormous challenge for German credit institutions, since their business models depend to a large extent on net interest income.
This is confirmed by the survey on the low interest rate environment conducted in 2015 by the Bundesbank and the German Federal Financial Supervisory Authority (BaFin). In mid-2015, the less significant institutions (LSIs) were asked about their expectations in the low interest rate environment.
The significant institutions, which are supervised directly by the ECB, were, by contrast, the subject of the 2014 comprehensive assessment and, in some cases, are taking part in the 2016 EBA stress test that is currently being conducted. In light of this, they were not included in the survey on the low interest rate environment.
Around 1,500 German credit institutions submitted data on their profit and loss accounts as well as balance sheet items for their internal planning and projections for the period from 2015 to 2019 (plan). In addition, the banks had to prepare projections based on four further pre-defined interest rate scenarios.
The low interest rate setting (LIR) scenario assumes that interest rates will persist at a low level. The "+200 basis points" ("+200 bp") and the "-100 basis points" ("-100 bp") scenarios, respectively, assume a sudden change in the yield curve by the said amounts starting from the baseline level at 31 December 2014. The latter scenario is to be calculated assuming both a static (stat) and dynamic (dyn) balance sheet. The definition of a static balance sheet specifies that there are no balance sheet adjustments over time.
page source http://www.bundesbank.de/
