Implications of ultra-low interest rates for financial institutions’ asset liability management – a policy-oriented overview

In a historical perspective, interest rates are currently very low. The further course of nominal and real interest rates crucially depends on how the macroeconomy will develop over the cycle and in a long-term structural perspective. In this contribution, we analyze how ultra-low interest rates affect financial institutions and their asset-liability management. In the short term, the impact depends on the relative duration of assets and liabilities. Hence, different financial institutions are affected differently depending on their balance sheet structures. Yet in the long term, the income of all types of financial institutions tends to suffer from ultra-low interest rates. A protracted period of (ultra-)low interest rates might compromise financial stability by eroding financial intermediaries’ capital; by amplifying the risk of bubbles and bursts; by heightening bond market volatility and its potential to trigger runs and fire sales in illiquid markets; and by causing risk positions to grow in the search for yield. Consequently, risks from a protracted period of ultra-low interest rates have been gaining attention from financial regulators and supervisors. Adequate action requires an integrated view of monetary policy, macroprudential and microprudential regulation and supervision of various types of financial intermediaries including banks, institutional investors and shadow banks.