How the low interest rate environment affected financial decision-making in Malta : financial intermediaries and banks’ perspective

Abstract

It is common practice for central banks to downsize rates when economies are underperforming. This mainly takes place to undermine household savings and to stimulate borrowing, in a bid to trigger an economic recovery, especially following the recent Global Financial Crisis. While these large-scale interventions were primarily intended to last temporarily, economies are far off their optimal levels, prompting several European Central Banks to cut rates further down to negative territory. This largely portrays the current economic situation which economies find themselves in, with deflation seemingly settling for a longer period than was expected. It proved to be a bold move that has arguably backfired, consequently; leading to distorted financial markets. As a result, the author of this dissertation will be investigating how this will impinge on investors and local players, being core financial institutions and intermediaries. Even though it is a policy which was enacted with good intentions, i.e. with the aim of reducing borrowing costs and increasing demand for loans, such intervention seems to be causing more harm than good. Customers would be understandably reluctant to pay money to hold cash in banks, while upon absorbing the effect of such negative rates, banks might be less willing to lend considering the adverse effects on profit margins. Deposit rates have also destabilised across all maturities due to excess liquidity increases in the banking system. Nonetheless, while banks reiterate that costs have been manageable, it remains to be seen whether economies would recuperate. As part of this research and analysis, the author shall also conduct semi-structured interviews with financial institutions, including local core banks and financial intermediaries. Such primary research will aid in understanding and broadening the overall knowledge on this area of research. With regards to the a priori expectations set, an analytical assessment shall be carried out on how such policies affected investment decisions, leading to investors seeking alternatives to investing in securities, with the aim of earning them an adequate yield.