International Monetary Fund (IMF) on Thursday highlighted the risks of persistent low interest rates and low growth on the global financial stability.
In the analytical chapters of its flagship Global Financial Stability Report, the IMF expected that a state of lower growth and lower interest rates could continue in some advanced economies, especially in view of the aging population and slower productivity growth.
“The persistence of a prolonged low interest rate environment would present a considerable challenge to financial institutions,” said the IMF.
“Over the long term, the scenario would entail significant changes to the business models of banks, insurers, and pension funds and the products offered by the financial sector,” it added.
According to the research, financial institutions would face depressed margins in the low interest rate environment, because banks find it difficult to lower rates on deposits to below zero, and to raise higher lending volumes in view of a likely decline in demand for credit from household in an environment of aging population and slower growth.
It said that smaller banks may be pushed into mergers or bankruptcy, while larger banks are likely to diversity abroad as they seek new and more profitable outlets in emerging markets.
Life insurance companies and pension funds will also face threats to their profits and solvency, and may be forced to raise more capital.
IMF calls on policymakers to make it easier to consolidate or liquidate failing firms, limit incentives for banks to take on excessive financial risk, and tightening requirements on insurers and pension funds to evaluate their assets and liabilities.