The debate in Europe concerning monetary normalization has become a new factor of uncertainty in the markets. What is striking about this issue is that it emerges precisely when the ECB has been most explicit about its future strategy, with the ultimate goal of providing greater certainty.
The yield curve adapts to the monetary authority’s communications. However, in the past, the opposite was true. These doubts are compatible with the improvement in banking profitability, a consequence of the greater operational efficiency achieved after the adjustments made and increased lending activity. Nevertheless, this does not seem sufficient for analysts who demand better figures in margins.
A few weeks ago, the Bank for International Settlements published a paper addressing this question: what are the implications of a prolonged period of low interest rates for financial stability? Sustainable improvement in profitability is the main premise for sector stability. The paper’s main conclusion confirmed banks’ adaptability, finding alternative ways to improve their profitability beyond margins. These range from cost cutting to digitalization, leading to greater operational efficiency gains and improved customer service. The BIS also ruled out that excessive risks are being taken that could weaken balance sheets. This is unlikely to occur given the current extreme regulation and demanding supervision of the sector.
Behind low official interest rates are both cyclical and structural factors. Overcoming the former allows for the beginning of rate normalization, but structural factors will limit their escalation. Banks will continue to find the best in this entire process.
