25 Feb 2016
Banks struggling with low to negative interest rates – Deutsche Bank
John Cryan, Co-Chief Executive Officer at Deutsche Bank, suggests that the banks have been generally struggling with low to negative interest rates.
Key Quotes
“They have been trying to work out how a charging structure with clients might work to enable banks to generate adequate returns for investors without repricing assets in a way that constrains the economy. At a certain point, cutting interest rates no longer has the desired effect of encouraging credit creation and stimulating economic growth.
The second point was that all investment banks are considering the impact of the Dodd-Frank Act on their ability to make markets. The intention of the act was to rule out banks’ proprietary trading. However, in markets that are generally declining, banks have been struggling to work out what “reasonably expected near-term demand” might be, particularly if it has to be observable and documented. And when there is not any, it is impossible to make a market.
Capital markets at the moment are demonstrating the lack of ability of banks to intermediate and provide market making function. As a result, markets are becoming unidirectional. Given the new structure of asset management, with lots of (quasi-)passive funds and momentum-driven strategies, when the market inflects it stays so until a consensus builds that it is overbought or oversold, and it re-inflects. This creates a financial infrastructure with less liquidity and excess volatility. Banks together with the regulatory community and policy setters need to do a lot more work to bring market liquidity back.”
Key Quotes
“They have been trying to work out how a charging structure with clients might work to enable banks to generate adequate returns for investors without repricing assets in a way that constrains the economy. At a certain point, cutting interest rates no longer has the desired effect of encouraging credit creation and stimulating economic growth.
The second point was that all investment banks are considering the impact of the Dodd-Frank Act on their ability to make markets. The intention of the act was to rule out banks’ proprietary trading. However, in markets that are generally declining, banks have been struggling to work out what “reasonably expected near-term demand” might be, particularly if it has to be observable and documented. And when there is not any, it is impossible to make a market.
Capital markets at the moment are demonstrating the lack of ability of banks to intermediate and provide market making function. As a result, markets are becoming unidirectional. Given the new structure of asset management, with lots of (quasi-)passive funds and momentum-driven strategies, when the market inflects it stays so until a consensus builds that it is overbought or oversold, and it re-inflects. This creates a financial infrastructure with less liquidity and excess volatility. Banks together with the regulatory community and policy setters need to do a lot more work to bring market liquidity back.”