Financial economics

• In the wake of the pandemic, the economic outlook has deteriorated, the recovery is uncertain and interest rates are expected to remain at historical lows for even longer.
• The persistently low interest rate environment can both support and dampen the profitability and resilience of euro area banks.
• This special feature examines some aspects of how the low-for-even-longer interest rate environment may affect bank lending margins, and in turn banks ability to lend to the real economy and overall financial stability.
• The compression of margins reflects the sluggish response to further policy rate cuts of deposit rates as they approach the zero lower bound.

1 Introduction

• The low interest rate environment has featured heavily in debates on prospects for the euro area banking system, which faces persistently weak profitability.
• That said, overall bank risk-taking was not judged to be particularly elevated, especially given the better capitalisation of banks since the crises earlier in the decade.
• In the wake of the pandemic, the low interest rate environment is expected to persist even longer, driven by lower real interest rates.
• Very low nominal interest rates have been a feature of the economic environment across advanced economies since 2009.
• They reflect a decline in equilibrium interest rates, i.e.
• Chart B.1 The phenomenon of very low real and nominal interest rates a feature since 2009 is set to persist in the wake of the pandemic
• The first section focuses specifically on the impact of the real versus the nominal component of interest rates on net interest margins, returns and loan loss provisions.
• It also investigates whether the adverse impact of falling interest rates on net interest margins worsens when nominal short-term rates are negative and when low rates persist for an extended period.
• Given the finding of non-linearity around negative interest rates, the second section discusses the prospects for overcoming the zero lower bound on customer deposit rates.

2 The role of real and nominal rates in bank intermediation

• The real rate component of interest rates may affect bank profitability separately from changes in inflation expectations.
• Nominal interest rates consist of two components: the real interest rate and compensation for the loss of purchasing power over the life of a contract, which reflects the prevailing inflation expectations.
• [2] An increase in real rates, especially long-term interest rates, tends to mirror a strengthening in the expected growth of the real economy.
• Alternatively, it may capture changes in the creditworthiness of bank borrowers, which tends to worsen if real debt servicing costs increase and result in higher credit risk premia embedded in bank lending rates.
• [3] The economic literature identifies a number of structural factors exerting downward pressure on real interest rates.
• [5] Even outside of a low interest rate environment, these intermediation margins increase when interest rates are higher.
• [6] Table B.1 The estimated impact of nominal and real rates on bank profitability
• Notably, higher nominal interest rates driven by variation in inflation expectations are found to be particularly important for margins.
• [7] The explicit distinction between changes in nominal interest rates due to variation in real rates and changes driven by higher inflation expectations is a key feature of this analysis.
• Higher interest rates when driven by higher inflation expectations are found to lead to a significant increase in net interest margins.
• Higher real long-term interest rates for a given level of inflation expectations tend to be associated with slightly lower net interest income.
• [8] Higher real short-term rates support banks margins, reflecting the limited sensitivity of remuneration on transaction deposits to market conditions.
• Lower nominal short-term interest rates squeeze margins more when short-term rates are low.
• The results from including a quadratic term of the nominal short-term interest rate in the specification show that low starting values for interest rates result in nominal short-term rates having a steeper impact on banks net interest margins (see ChartB.2, left panel).
• [9] Adding an interaction term between the short-term interest rates and a dummy for the period over which negative interest rates on excess reserves held in the ECBs deposit facility have been applicable reveals that the impact of nominal short-term interest rates on the net interest margin increases by a factor of 10 when short-term rates are negative compared with a positive starting point.
• This is also consistent with there being a zero lower bound on the interest rates for retail deposits.
• The impact of low interest rates on bank profitability may change over time, but in principle the effect of longevity can operate in both directions.

3 Prospects for the pass-through of negative interest rates to deposit rates

• Since 2014 euro area banks have only gradually moved to charging negative interest rates on customer deposits.
• Negative rates in this segment are observed only in some euro area countries (Germany, Italy, Cyprus, the Netherlands, Finland and Belgium).
• Corporate deposits are subject to negative rates in both the longer-term and the overnight segments, the latter being by far the most relevant category.
• A number of structural features of the economy may explain the relevance and persistence of the zero lower bound on deposit rates.
• For corporate deposits, existing analyses illustrate that negative rates are more likely to be passed through by stronger banks.
• Chart B.3 The distribution of NFC deposit rates Evolution of the distribution of NFC deposit rates, across banks (percentage points) Deposit rates versus share of large loans to NFCs (x-axis: percentage of total NFC loans; y-axis: percentage points)
• Looking ahead, banks in the euro area may find it increasingly difficult to continue charging negative rates on a significant share of their deposits.
• Market rates are expected to remain at historically low levels for a long time, largely due to developments in the structural factors underpinning the low-rate environment.
• Consequently, the sluggishness by which banks charge negative deposit rates more extensively will have a continuing impact on their margins and profitability.

4 Conclusion

• Prior to the pandemic, there was already a debate as to whether the balance between supportive and dampening effects of low interest rates on euro area bank profitability was changing.
• The main supportive effects come from the positive impact of low interest rates on the economic outlook, decreasing loan losses due to improved borrower creditworthiness, and increasing intermediation volumes.
• The dampening effects studied in this special feature, reflect the negative impact of low rates on net interest margins.
• Expectations are now for historically low rates to remain for even longer, still driven largely by real interest rates.
• This is especially likely if the pass-through of negative interest rates continues to remain sluggish.
• Behind the aggregate improvement of risk-adjusted returns in recent years, the extent and drivers of recovery differ by portfolio type (see ChartA, upper panel).
• At the same time, volumes increased most markedly for sovereigns and, to a lesser degree, for mortgage and NFC portfolios.
• [16] Risk-adjusted returns decline in all three scenarios, but the largest declines are under the COVID-19 severe scenario (although scenarios, samples and methodologies have changed over time).
• [17] In all cases, returns on the household consumer credit portfolio fall the most, driven by increases in the cost of risk.
• Furthermore, in the COVID-19 central and severe scenarios, effective interest rates remain low and cannot offset the fall in returns.
• For household mortgage lending, effective interest rates also fall, while the cost of risk rises.

• NEW YORK, Nov. 25, 2020 (GLOBE NEWSWIRE) -- HC2 Holdings, Inc. (HC2 or the Company) (NYSE: HCHC), a diversified holding company, announced today the closing of its successful rights offering, which expired at 5:00 p.m., New York City time, on November 20, 2020.
• Concurrently with the closing of the rights offering, Lancer Capital converted all of its shares of preferred stock into 11,891,539 shares of common stock (the conversion).
• After giving effect to the rights offering and the conversion, the Company will have 76,586,573 shares of common stock issued and outstanding.
• HC2 expects to use the proceeds from the rights offering for general corporate purposes, including debt service and for working capital.

• WARSAW, N.Y., Nov. 25, 2020 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (NASDAQ:FISI) (the Company), parent company of Five Star Bank, SDN Insurance Agency, LLC (SDN), Courier Capital, LLC (Courier Capital) and HNP Capital, LLC (HNP Capital), announced today that its Board of Directors has approved a quarterly cash dividend of $0.26 per outstanding common share.
• The Company also announced dividends of $0.75 per share on its Series A 3% preferred stock and $2.12 per share on its Series B-1 8.48% preferred stock.
• Courier Capital and HNP Capital provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.
• Financial Institutions, Inc. and its subsidiaries employ approximately 630 individuals.The Companys stock is listed on the Nasdaq Global Select Market under the symbol FISI.Additional information is available at www.fiiwarsaw.com .

• No action is required by Aimco stockholders of record on December 5, 2020 to receive the distributed shares of AIR Class A common stock.
• During this time, an Aimco stockholder will have the option of selling the right to receive shares of AIR Class A common stock in the separation while retaining shares of Aimco Class A common stock.
• Stockholders of Aimco who hold Aimco Class A common stock on the record date for the REIT Distribution and do not sell those shares regular-way prior to the distribution date will receive a book-entry account statement reflecting their ownership of AIR Class A common stock or their brokerage account will be credited with AIR Class A common stock.
• In addition, stockholders of Aimco will retain their shares of Aimco Class A common stock.