How US banks should prepare for a potential negative interest rate environment

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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.

Why negative interest rates matter for banks

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.

How banks should think about near-zero rates

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 four high-value, no-regret moves that you can make to address low interest rates

  • Develop a pricing strategy for each product and client segment. Manage long-term customer relationships.
  • Conduct scenario planning for balance sheet management and create an interest rate risk management playbook. Consider trade-offs between holding cash, rebalancing or growing your investment portfolio and lending.
  • Make sure your systems, models and operations allow for negative rates. We recommend that you perform Y2K-like system stress tests.
  • Assess potential counterparty, compliance, legal and tax issues. We believe a negative rate policy could introduce consequences every bit as complicated as the end of LIBOR, particularly in the case of floating-rate contracts that don’t anticipate the application of negative rates.

The bottom line

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.

Contact us

Julien Courbe

Julien Courbe

Financial Services Leader, PwC US

Alejandro Johnston

Alejandro Johnston

Principal, Financial Services Risk Practice, PwC US

Krishnan Chandrasekhar

Krishnan Chandrasekhar

Financial Services Tax Leader, PwC US

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