Retail banking: air will become thinner with rising interest rates

In the post-low interest rate environment, that is to say, when interest rates rise significantly again, the German banking sector runs the risk of experiencing drastically tightened interest margins. It therefore follows that the longer the low interest rate environment persists and the greater the subsequent interest rate rise, the more banks’ net interest income will be hit in future. Moreover, competition between direct banks and traditional branch banks with regard to conditions is likely to be extended into a second round in the wake of rising interest rates.

The intense competition in the German retail banking sector has greatly limited flexibility in terms of conditions that credit institutions can offer. As there is no immediate sign of any new sources of revenue, two strategic options remain on the table in order to counteract the onset of deteriorating cost-income ratios: cutting costs and/or increasing market shares. Overall, rising interest rates should lead to increased pressure on profit and loss accounts and rising risk scenarios, while banks may find it more difficult to build up reserves.

The most recent monetary policy decisions taken by the ECB certainly underline the fact that the ECB does not want to allow a situation to arise in which interest rates rise substantially and uncontrollably. This is to be welcomed with respect to financial market stability and future developments in banks’ interest margins. However, monetary policy remains very expansionary in the light of the extended bond buying programme. Any thoughts about ending the bond buying programme and raising key rates have therefore been pushed further into the background. At the same time, increasing interest rate change risks are building up at banks. In this context, it would be imperative to initiate a change in monetary policy as soon as possible, although any impact of this would also need to be kept effectively in check.

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