Bank intermediation activity in a low interest rate environment

BIS Working Papers  |  No 807  | 
30 August 2019


This paper examines how the long period of low interest rates has affected the business activities of banks.


The new findings draw on data for 113 large international banks headquartered in 14 major advanced economies for the period 1994-2015. The analysis distinguishes between three types of effect on banks from short-term interest rates - on their income, balance sheets and risk exposures. It weighs the possibility of effects that vary with the level of rates. It also filters out the influence of macroeconomic, regulatory and bank-specific factors.


Low interest rates have prompted banks to shift from interest-generating to fee-generating and trading activities. This has partially offset the fall in banks' returns on lending ("interest margin"). The shift is stronger for low capitalised banks. Banks have also made moderate changes in the way they fund themselves, preferring deposits over short-term borrowing. In addition, they have responded to new regulation by reducing the riskiness of their assets. At the same time, provisions against losses on lending have fallen, which may indicate that potential problem loans are being repeatedly rolled over ("evergreening").


This paper investigates how the prolonged period of low interest rates affects bank intermediation activity. We use data for 113 large international banks headquartered in 14 major advanced economies during the period 1994-2015. We find that low interest rates induce banks to shift their activities from interest-generating to fee-related and trading activities. This rebalancing is stronger for low capitalised banks.Banks also moderately adjust their funding structure, away from short-term market funding towards deposits. We observe a concomitant decline in the risk-weighted asset ratio and a reduction in loan-loss provisions, which is consistent with signs of evergreening.

JEL codes: C53, E43, E52, G21

Keywords: monetary policy, bank business models, financial crisis