When examining the current interest rate levels in the USA and Europe, two movements can be observed. First, a sustained decline in long-term interest rates that has lasted for the better part of the last two decades. That has been driven by demographic factors, the progressive integration of China into global capital markets, and − after the global financial crisis − a decline in the propensity to invest coupled with a search for safe assets. Second, there has been a similar decrease in short-term interest rates, which is the result of monetary policy choices, aimed at easing financing conditions in the economy, to support economic recovery.
In the euro area, this has led to an intense debate over the current level of interest rates, which pits the European Central Bank (ECB) against Member States and financial industry representatives. Member States, especially those with a high rate of savers in the population, claim that the current interest rates translate into very low (and soon, possibly negative) returns for savers, effectively incentivizing them to engage in riskier investments instead of the prudent accumulation of capital. Similarly, they affect both pensioners − given that their consumption depends on the return they get on their savings − and those saving for retirement (because they slow the rate of accumulation of pension assets). This, they claim can have repercussions both in terms of stability − if the search for yield creates bubbles − as well as creating social tensions. As for industry representatives, they claim that the current environment is depressing their revenues and making their models unsustainable.
The ECB responds that very low rates are the symptom of an underlying problem − i.e. the global excess of savings over profitable investments. For this reason, the challenges created by the current environment must be met by sustainable fiscal policies, structural reforms and by taking further steps to complete the European Monetary Union. Such steps would encompass the full transposition into national law of the relevant directives (e.g. the Bank Recovery and Resolution Directive – BRRD) by all Member States, the setting up of a credible common backstop to the Single Resolution Fund, and the launch of a European Deposit Insurance Scheme (EDIS).
Several recent papers examine the current situation. They find that, in the short term, different financial institutions will be affected differently − depending on their market power and balance-sheet structures. But if the current situation prevails, even in the medium term, it could potentially have a severe impact on the income of banks, (pension and investment) funds and life insurers, and force them to fundamentally review their asset-liability management models. This may result in a search for yield that could increase the risk of bubbles (and potentially bursts) and heighten market volatility.
In this context, the European supervisory authorities and the IMF have stressed the importance of interaction between the competent national authorities and financial institutions, as well as the need to collect more and better data, establishing global standards and analyzing (including through stress tests) the various risks inherent to these institutions.