Low Interest Rates
Low interest rates are primarily affecting profit margins of small and medium-sized
banks which depend the most on deposits for funding.
Most of these institutions will be
able to withstand the strains caused by the low interest rates, as they are relatively well
capitalised (Deutsche Bundesbank, 2015).
The government reformed life insurance
regulation in 2014, allowing insurance companies to reduce their long-term payment
commitments which they had contracted when interest rates were higher. However, the
credit institutions foresee a fall of pre-tax profit by around 25% by 2019 and insurers’
resilience is uncertain should market interest rates remain low (Deutsche Bundesbank,
2015).
If interest rates stay low financial institutions may choose to take on more risk to
protect returns. For example, life insurance companies have increased the share of equities
in their portfolios. Low interest rates make it more difficult to expand private pension
schemes, as intended by the government
EU Forecast
euf:ba18a:39/nws-01