Flat yield curves are a key threat to bank margins as rates will stay low for longer, according to Moody’s.
“Since the 2008 financial crisis central bank rates fell sharply, but NIMs in the euro area and the US have remained surprisingly resilient so we believe that the correlation between the absolute level of short term market rates and net interest margins (NIMs) is weaker than is commonly supposed by market participants,” said Louise Lundberg, VP-Senior Credit Officer at Moody’s.
“The shape of the yield curves has a stronger influence as banks often engage in ‘maturity transformation’ – borrowing short and lending long.”
Moody’s expects both the euro area and Japanese yield curves to remain flat for several years ahead, putting pressure on banks’ net interest margins in both regions.
In the US, interest rates are likely to remain low and the yield curve to remain relatively flat over the next two years. However, in contrast to Japan and the euro area, Moody’s does not expect US interest rates to turn negative. US banks also appear to be less sensitive to the yield curve than European lenders, as their maturity gap is less pronounced.
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