Das: Can Banks Survive Negative Rates?

• Das: Can Banks Survive Negative Rates?
  by Satyajit Das, op-ed via Bloomberg.com, via https://www.zerohedge.com/
  The declining economic outlook and increasing political pressure are pushing central banks into more aggressive unconventional monetary policies.
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  Simultaneously, fears are growing that such steps, especially negative interest rates, actually threaten the stability of the financial system. They risk setting off dangerous feedback loops in credit markets and the real economy, where the second and third-order effects are difficult to anticipate or control.
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  As the experience of banks in Japan and Europe has illustrated, the process follows a predictable pattern.
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  Low growth, low inflation, output gaps, unemployment and underemployment — combined with financial instability, especially volatile asset prices — first prompt central banks to lower rates below the zero bound. The objective is to stimulate borrowing to finance consumption and investment, thus setting off a self-sustaining growth cycle.
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  Typically, however, negative rates aren’t fully reflected in actual borrowing and lending rates. Regulations require banks to maintain customer deposit bases. The fear of losing customers dissuades those banks from cutting deposit rates too far. In Europe, to date, only large corporations have faced negative rates, which means they’re charged to maintain deposits.
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  As interest rate margins contract and profits are squeezed, banks raise fees or turn to other revenue measures to boost earnings. This keeps actual borrowing costs relatively high, undercutting the whole point of a negative rate policy.
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