The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
A prolonged low-interest-rate environment presents a significant challenge to banks and is
likely to entail major changes to their business models over the long-run. Lower returns to
maturity transformation in the face of flatter yield curves and an inability to offer deposit
rates significantly below zero combine to compress bank earnings in this environment.
Smaller, deposit-funded, less diversified banks are hurt most, increasing consolidation
pressures and reach-for-yield incentives, presenting new financial stability
challenges.To the extent that such an economic environment reflects a new, steady-state
with lower equilibrium growth driven by population aging and slower productivity
growth, lower credit demand is likely to drive banking toward provision of fee-based,