Financial institutions are unprepared to operate in a negative rate environment says the Risk Management Association
With central banks facing unique challenges – and running out of options - negative interest rates are one consideration, despite being far from a preferred option.
While rates falling below zero would be bad news for investors who rely on higher rates, financial institutions (FIs) may also struggle to operate in this environment according to a new report.
The Risk Management Association (RMA) says that its survey of FIs – ranging from global to regional – found that many are unprepared to operate with negative rates and, although there is only a small chance that the Fed would take this route, RMA says banks must be ready.
"Negative rates in the US are unlikely for now, but definitely not impossible at some point," said Nancy Foster, President and CEO of RMA. "Now is the time for banks to think the unthinkable and get ready for something that has already happened in other major economies. RMA and its councils stand ready to support our members in planning for a day when the unthinkable becomes the inevitable."
Europe and Japan have blazed the trail, serving to desensitize managers to the psychological barrier that crossing the zero floor might present.
At risk
According to the RMA research, 75% of FIs would be ready to operate under negative rates within a year, but this would leave many at risk if the Fed moved faster than that.
The FIs fared better on their technology capabilities with 60% reporting that their software and systems are able to handle negative rates across five classes of models and scenarios.
