Managing the Risks of Negative Interest Rates

The acceleration in the issuance of government debt since the global financial crisis has led central bankers to engineer interest rates that are historically low in nominal terms and consistently lower than inflation rates. Although the ostensible aim of this policy is to stimulate economic growth, maintaining negative real rates also goes a long way so that government debt is manageable and will decline in the long run, relative to the size of the economy. Financial institutions hold the great majority of government debt, and their books of retail and corporate loans are expanding briskly at a time when ultra-low interest rates make borrowing especially attractive. Rates paid on deposits are low, in advanced economies, even negative in the euro zone in nominal terms. That helps to offset the reduction in income that banks earn on their lending. Even so, the extreme and unique conditions resulting from persistent negative real interest rates mean that banks must take particular care to manage their interest-rate risk in the context of other risk types and the banks’ profit-and-loss analysis.

How to handle negative interest rates in a CIR framework

In this paper, we propose a new model to address the problem of negative interest rates that preserves the analytical tractability of the original Cox–Ingersoll–Ross (CIR) model without introducing a shift to the market interest rates, because it is defined as the difference of two independent CIR processes. The strength of our model lies within the fact that it is very simple and can be calibrated to the market zero yield curve using an analytical formula. We run several numerical experiments at two different dates, once with a partially sub-zero interest rate and once with a fully negative interest rate. In both cases, we obtain good results in the sense that the model reproduces the market term structures very well. We then simulate the model using the Euler–Maruyama scheme and examine the mean, variance and distribution of the model. The latter agrees with the skewness and fat tail seen in the original CIR model. In addition, we compare the model’s zero coupon prices with market prices at different future points in time. Finally, we test the market consistency of the model by evaluating swaptions with different tenors and maturities.

The lacking interest in interest rates: will the phase-out of LIBOR and negative rates go unnoticed by arbitration practitioners?

Interest plays a crucial role in ensuring that the compensation obtained by the winning party does not diminish throughout the many years between the breach and enforcement of the award. Despite its importance, interest is often the last element considered by arbitration practitioners, who sometimes rely on popular interest rate benchmarks that worked well in the past. However, some familiar benchmarks might no longer achieve the intended outcome. We have reviewed public investment arbitration awards rendered in 2019–2020 and identified three issues: the use of LIBOR despite its imminent phase-out, the use of benchmarks that have become negative, and the omission of interest from awards rendered in favour of respondent states. While solutions may vary, we discuss mechanisms that may be used to review existing awards, alternative interest rate benchmarks that may replace LIBOR, and floors that might be helpful to deal with negative interest rates. Arbitration practitioners regret to see it when transactional lawyers negotiate arbitration clauses as ‘midnight clauses’. However, it often escapes the arbitration community that it adopts a similar last minute approach to interest rates. It is hoped that this article might help interest rates avoid the fate of being a ‘midnight remedy’.

Banks and Negative Interest Rates

In this article, we review the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks’ retail deposit rates is hindered by a zero lower bound. We summarize existing research on the impact of negative rates on banks’ lending and securities portfolios as well as their consequences for the real economy. Finally, we discuss the role of different initial conditions when the policy rate becomes negative, and potential interactions between negative policy rates and other unconventional monetary policies. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Central bank interest policy: conceptual concepts and socio-economic context

The article reveals the goals and mechanisms of the interest rate policy of the central bank. The role of the discount rate in ensuring financial and macroeconomic stability is shown. The Taylor rule is presented and justified in a modified form, by including the money supply parameter in it. The phenomenon of negative interest rates is revealed.

Negative interest rate: Way to tackle inflationary housing prices

While housing affordability is on drop by the rising prices, specially in large cities, the young generation suffers from the pending independence as a result. Despite the significantly good industrial performance in the construction sector in Australia, reduced housing prices is still under burden by the middle mans and real estate brokers. Several socio-economic factors are indeed involved in the rising prices such as unequal wealth distribution, banking strategies, wages growth rate, mortgage interest rate, population growth, etc. which are being discussed in this article. Data had been collected from the Australian Bureau of Statistics in order to compare and analyze the effectiveness of negative interest rates on housing affordability. New financial asset classes such as cryptocurrencies had also been introduced in order to propose alternatives to the traditional investment banking which also ensures profit earning for bankers.