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Bloomberg
As policy makers globally prepare to cut borrowing costs again, banks around the world are feeling the heat.
Rock-bottom interest rates can help stoke growth, but they also put the squeeze on lending margins. Big US banks including JPMorgan Chase & Co and Citigroup Inc, which reported second-quarter earnings, are already seeing the revenue impact of declining interest rates  — even before the Federal Reserve delivers a cut expected at the end of the month.
Their European and Japanese peers, which release their results in the next three weeks, are likely to struggle with the same issue. And they’ll be starting from a weaker position, as their central banks have cut deeper — to negative benchmark rates — and stuck to that policy even after the Fed reversed course and temporarily raised rates in the US.
“Low rates have hurt bank profitability in most developed markets for years now, and the pain doesn’t seem to be coming to an end any time soon,†said Jan Schildbach, head of research for banking and financial markets at Deutsche Bank AG in Frankfurt.
The rise of unorthodox monetary policies has upended the model of traditional banking that held for decades — one epitomised by the old American joke that commercial bankers borrowed money at 3 percent, lent it out at 6 percent.
In Europe, the squeeze from negative rates prompted drastic makeovers at some of the region’s biggest firms. Japanese lenders have been driven beyond their borders in search of growth.
Lower interest rates theoretically help banks too, by increasing demand for loans. That means the potential harm to net interest income — the difference between what banks collect from borrowers and what they pay depositors — would be countered by rising loan volume.
But it hasn’t always worked that way. Low rates sometimes haven’t provided enough of an impetus to rekindle demand. At other times, the uptick didn’t appear for several quarters — or years — while banks began suffering immediately.
“In Europe, further accommodative policies will be more painful for the banks,†Schildbach said. “In the US, it will slow down revenue and profit growth.†The European Central Bank went negative in 2014, beginning to charge banks for the excess reserves they hold there. The Bank of Japan followed suit in 2016.
Those cuts brought down long-term borrowing costs, squeezing banks’ margins. When short-term interest rates are negative, banks have a hard time passing that on to customers because many of them — households and small businesses, especially — would simply pull their money out of the banking system rather than pay a lender to hold onto it.
The negative rates by the BOJ, the ECB and several other western central banks have pushed the yields of many government bonds and even some corporate debt to negative territory as well.