Like it or not, the notion of a prolonged low interest rate environment or the Federal Reserve imposing negative interest rates as a tool to jumpstart an economic recovery is back on the table, and US banks are in the crosshairs.
While not a new idea — central banks in Europe have been using negative rate policies for years with mixed results — most US bank infrastructure and risk models don’t take negative rates into account. If the Fed implemented a negative rate policy, effectively charging banks for holding excess cash, your bank’s net interest margin would be materially impacted. Further, the idea of paying fees to deposit money in a bank isn’t likely to sit well with US customers.
Even if the Fed never implements a negative rate policy, the current near-zero rate environment requires bank managers to rethink their strategies and balance sheet management playbooks. We’ve been working with US banking clients to develop strategies that we believe will serve you well no matter which course the Fed takes.
We recommend that you start planning and testing now for a potential negative interest rate environment. Use this time to strengthen your long-term positioning and mitigate the impact of negative rates so you’ll be competitive when lending conditions improve.