Financial Services Industry Strategy in the Era of Ultra-low Interest Rates
The major economies of the world have entered a stage of ultra-low interest rates. Since the 2008 Global Financial Crisis(GFC), long-term yields on government bonds of have fallen below 2%, with some European countries experiencing negative interest rates since the Eurozone Crisis. The same is true of major emerging countries as well, including Korea, whose 10 year government bond yields are at below 2%, and call rates at 0.5% in 2021.
For developed economies, the trend of falling interest rates began in the 1980s, as the decade of high inflation came to an end with stricter monetary policy. For major emerging economies, interest rates began to fall with the onset of the 1997 Asian Financial Crisis. That fact that the phenomenon of “lower for longer” interest rates is global in nature and expands a period of decades indicates that its root causes are also common globally and systematic in nature. The main culprits of low interest rates are falling potential growth rates, demographic changes, and expansionary monetary policy following major economic and financial crises.
The implication of a prolonged low interest rate environment is significant both for the economies undergoing such changes as it is for the financial services sector. Lower yields on safe assets makes asset building more difficult, such as for retirement planning, which implies a greater burden on government to expand social safety nets. Also, without a means to increase yields on household portfolios, current and future consumption will necessarily decline, leading to lower household welfare. As such, the role of the financial services sector is critical in effectively providing financial products and services that can aid in the portfolio re-balancing of households as well as institutional investors such as pension funds.
This research aims to examine the impact of a prolonged low interest environment, particularly from the perspective of the financial services industry. From a theoretical view point, low interest rates lead to increasing value of risky assets, such as stocks. Also, levels of yields below a threshold can lead to behavioral changes by households toward higher risk taking. However, actual changes in asset prices, as well as investor behavior, need to take into account concurrent changes alongside interest rates. In addition, the realization of a “money move” requires the supply of appropriate financial products and services that are aligned with the risk-return appetite of investors. Also, trust in the financial services industry is an important factor in whether and to what degree “money moves” take place.