Period Of Low Interest Rates Research Articles

User Cost of Housing Analysis of the German Real Estate Market

Background: This study looks at the development of the German real estate landscape, which recorded a continuous rise in prices between 2009 and 2022. These were due to a genuine excess demand, a shortage of supply and favorable financing conditions. In the course of 2022, mortgage rates then rose after a historically long period of low interest rates. Aim: This study aims in particular to assess whether the financial advantage of home ownership remains robust. The aim is to determine the relative attractiveness of home ownership compared to renting in all 401 German districts and independent cities. Methods: The owner-occupier costs are determined using the user cost of housing approach and compared with the current rental prices in the respective cities and districts. Various factors are taken into account, including the purchase price, financing costs, maintenance and rental prices. Results: The results of the analysis show that home ownership still offers a considerable cost advantage on average across Germany: In mid-2023, it is around 57% cheaper per square meter to invest than to rent. However, it is important to point out that this result does not take into account differences in the population’s ability to afford home ownership. Furthermore, the analysis raises questions about the sustainability of past house price growth and whether this increase is due to fundamental factors or low mortgage rates. In this sense, the study confirms that home ownership on the German real estate market remains economically favorable compared to renting, even with increased interest rates. It underlines how important it is to consider the long-term benefits for wealth accumulation when deciding between owning and renting. Practical relevance/social implications: The study is of practical relevance for people who rent an apartment or house in Germany and are considering whether it is sensible and economical for them to invest in property. The findings from the analysis are helpful for current purchasing decisions. Originality/value: It also offers original results and provides the reader with added value, as it captures and evaluates current real estate developments on the German market in a well-founded manner.

From Hero to Zero: The case of Silicon Valley Bank

This paper examines the factors contributing to the rapid collapse of Silicon Valley Bank, once regarded as one of the best banks. We show that the bank invested heavily in debt securities during a period of low interest rates, and the subsequent surge in interest rates in 2022 resulted in significant unrealized losses. Additionally, the bank's deposits were heavily concentrated among a small group of venture capitalists, which increased the likelihood of a bank run. Furthermore, the bank held less equity capital and had an inefficient risk management system, exacerbating the impact of the risk. Overall, the mismanagement of assets and liabilities led to the bank’s failure.

Zombification in Poland in particular during COVID-19 pandemic and low interest rates

This article addresses the issue of corporate zombification in the case of listed companies in Poland. The purpose of this paper is to analyse financially vulnerable zombie firms from the listed non-financial companies in Poland, in particular, during the COVID-19 pandemic and the period of low interest rates.Data from 2000 to 2021 from the EMIS database on the financial statements of companies registered on the Warsaw Stock Exchange and NewConnect were used. In the process of research, such methods as local linear projection regression, logistic regression combined with the scoring methods were used.The results of the research show that the economic crisis caused by the coronavirus pandemic and the period of low interest rates have increased zombie firms among the listed companies in Poland. The anatomy of zombie firms differs significantly from the anatomy of non-zombie companies.The dynamics of financial indicators of zombie companies that appeared during the recession (Global Financial Crisis, the COVID-19 pandemic) and the period of low interest rates as in the period without a recession, show the ambiguity of the financial condition of these enterprises. For the survival of zombie companies, the most important indicator is their size. The continued existence of zombie firms also depends on leverage and profitability as the main financial indicators.

Floating Rate Notes in High Rate Environment and the Stock Market Response

Previous study finds that the firms with inferior growth options tend to issue callable bonds. Typically, these firms are characterized by stock underperformance. Previous study also finds that the floating rate as a superior alternative to the call provision, which is restrictive, when the interest rates are likely to fall. We study the long-term stock performance of floating rate notes (FRNs) issuing firms, issued when the interest rates are high. Stock overperformance would suggest floating rate as a preferred choice by the firms with high growth options rather the call option. We find that the FRNs are generally investment grade with extremely rare presence of a call option. We perform the analysis using Buy and hold abnormal return (BHAR) as the proxy for the long-term stock overperformance/underperformance. A sample of floating rate notes issued (1654) from 1992 to 2007, a period of high interest rates, reveals significant overperformance by the floating rate notes issuing firms in the high-rate paradigm. High growth firms, in the high-rate environment, significantly benefit from the floating rate provision which is less restrictive and less costly than the call option, which typically provides call protection period and pays a call premium. Floating rate provision better mitigates the interest rate risk for the firms in the high-rate environment. We find that the smaller, high growth, higher leverage, less profitable firms with greater agency issues benefit more from issuing FRNs in the high-rate environment. Our study has relevance to the stock portfolio construction and performance. We also perform a comparative analysis using the sample of floating rate notes issued (270) during 2008 to 2018, a period of low interest rates, and find stock underperformance. The implications are that the call option likely is a better choice for the firm since the firm preserves the right to forego exercising the option.

A comparative study on determinants of housing mortgage prepayment of individual borrowers

This paper examines how the macroeconomic environment affects the determinants of prepayment of mortgage loans from October 2004 to February 2020. For more accurate analysis, the authors define the timing of prepayment not only before the loan maturity but also at the time when 50% or more of the loan principal is repaid. The results show that, during the global financial crisis as well as the recent period of low interest rates, macroeconomic variables such as interest rate spreads and housing prices have a different effect compared to the normal situation. Also, significant explanatory variables, such as debt to income (DTI) ratio, loan amount ratio and poor credit score, have different effects depending on the macroenvironment. On the other hand, in all periods, the possibility of prepayment increases as comprehensive loan to value (CLTV) increases, and the younger the age, the shorter the loan maturity. The results suggest that, in the case of ultralong (40 years) mortgage loans recently introduced to support young people purchasing houses, the prepayment risk can be, at least partially, migrated by offsetting the increase in prepayment by young people and the decrease in prepayment due to long loan maturity. In addition, this study confirms that the accelerated time failure model compared to the logit model and COX proportional risk model has the potential to be more appropriate as a prepayment model for individual borrower analysis in terms of the explanatory power.

Interest rate shocks, competition and bank liquidity creation

We study the effects of interest rate shocks (IRS) on banks’ liquidity creation. A unique supervisory data set from the Deutsche Bundesbank allows identifying banks’ liquidity creation for the real economy and the effects of banking market competition. Here, we employ a novel approach to account for IRS that are both unexpected and effective for a bank’s business model. We find that higher individual pricing power in the market lowers banks’ liquidity creation, which is in line with theory that monopolistic firms undersupply the market when utilizing their high pricing power in the bank competition–liquidity creation nexus. While positive IRS per se lead to an increase in bank liquidity creation, we find that a high bank-individual pricing power curbs this impact on liquidity creation significantly. Moreover, we show that monetary policy was most effective during the global financial crisis and for well-capitalized banks, whereas periods of low interest rates are characterized by the persistent increase in liability-side liquidity creation.

A prolonged period of low interest rates in Europe: Unintended consequences

AbstractWe examine the potential adverse effects of a prolonged period of low interest rates on financial stability from multiple perspectives. First, we provide a unique comparison of natural rates of interest estimated using two approaches—with and without financial factors—for six large European countries inside and outside the euro area. Second, we provide a comprehensive review of the empirical literature, allowing us to identify and categorize financial vulnerabilities, which may be created and fueled by low interest rates. Third, we discuss a situation in which a prolonged period of low interest rates may lead to a point of no return by contributing to higher indebtedness, overvalued asset prices and underpriced risks, resource and credit misallocation, and lower productivity. With respect to all of that, we offer a few monetary policy considerations. Specifically, we suggest that (i) monetary policy should act symmetrically over the medium to long term, (ii) both the short‐term and long‐term costs and benefits of pursuing accommodative or restrictive monetary policy should be accounted for, and (iii) monetary and macroprudential policies need to be coordinated, and their interactions should be accounted for in order to find the best policy mix for the economy.

State-Dependent Effects of Monetary Policy: The Refinancing Channel

This paper studies how the impact of monetary policy depends on the distribution of savings from refinancing mortgages. We show that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from refinancing. We construct a quantitative dynamic life-cycle model that accounts for our findings and use it to study how the response of consumption to a change in mortgage rates depends on the distribution of savings from refinancing. These effects are strongly state dependent. We also use the model to study the impact of a long period of low interest rates on the potency of monetary policy. We find that this potency is substantially reduced both during the period and for a substantial amount of time after interest rates renormalize. (JEL D15, E21, E43, E52, G21, G51, R31)

THE IMPACT OF FINANCIAL STABILIZATION POLICIES ON THE LEVEL OF NON-PERFORMING LOANS: PROBLEMS AND CONTRADICTIONS (THE CASE OF CYPRUS)

The relevance of the article stems from the current level of non-performing loans (NPLs), which remain very high and pose risks of financial instability in Cyprus. Further reducing the high level of NPLs is one of the main strategic objectives of the Cyprus Stability Program for the period 2019-2022. The purpose of this paper is to identify problems and contradictions in the current financial stabilization policy in the banking sector of Cyprus and to help policy makers of financial policy to trace the problems and contradictions in the course of its implementation. The object of the study is the financial and, in particular, the banking sector of Cyprus, which is largely concentrated within the two systemic banks. The methodology of the study is based on theoretical and methodological analysis of the scientific literature, statistical method, observations, comparative method and analysis, as well as analytical and comparative graphs, comparative and analytical approaches. The results of this study show that the profitability of the banking sector of Cyprus is still negatively affected by a long period of low interest rates, as well as the burden of increasing provisions for bad debts. The adoption of the accounting standard (IFRS9) will lead to a further increase in the amount of provisions for impaired loans and thus have a negative impact on the profitability of banks. In addition, the decrease in the loan-to-deposit ratio was mainly due to a significant reduction in the loan portfolio of Cypriot banks. The significant decline in total lending by banks is due to the high level of non-performing loans in Cyprus, accounting for 31.8% of total loans at the end of November 2018. Moreover, about half of all NPLs are NPLs of households. The ESTIA program was created to address NPLs in Cyprus. Overall, the results of the study also show that the launch of the ESTIA program in 2019 will lead to an increase in moral hazard. Significant growth in demand for real estate in Cyprus is due to government policy and is carried out through the Citizenship for Investment program. Increased demand causes prices to rise and forms a bubble in the real estate market. In turn, the formation of a housing price bubble is one of the pre-crisis conditions.

Response of Mexican life and non-life insurers to the low interest rate environment.

The purpose of this research is to examine whether insurers have improved their economic performance through efficiency as a reaction to the prolonged period of low interest rates. The results of an analysis of 22 years of data, using a two-stage data envelopment analysis approach (DEA), show that there is an inverse relationship between efficiency and interest rate. The non-life insurance group had a superior level of efficiency compared with that of the life insurance group. It seems that life insurance companies, to some extent, transferred their inefficiency to customers to maintain their solvency. Additionally, this research shows that companies with substantial market power and bancassurance exceeded the performance of the rest of the industry.

Unconventional Monetary Policy and the Search for Yield

We use U.S. syndicated loan market data to examine how banks responded to the unprecedented injection of reserves by the Fed over several rounds of quantitative easing (QE). We show that higher reserves boost bank lending. To establish a causal interpretation for this finding, we construct a novel instrument for the bank-level exposure to QE by using confidential data on daily bank reserves. Next, we identify a mechanism that can explain this link. We show that the connection between banks' reserves and lending volume depends upon the net return that banks enjoy on reserve balances. Our findings demonstrate that the search for yield component of the risk taking channel — wherein banks increase risk-taking to achieve nominal profitability targets during periods of low interest rates — is also a relevant consideration for policymakers during massive reserve injections.

The Difference Between Preferred & Common Stocks in Europe from the Market Perspective

Companies listed on the stock market must devote a great deal of attention to their market position. They must increase their competitive advantage in the undeniably key process of the issuance of stocks. As the issuance of preferred stocks has increased after the last crisis and in the current period of low interest rates in Europe, they are becoming more favoured investment instruments, we decided to analyse the real properties of preferred stocks in Europe in order to increase the efficiency of joint-stock companies. Using a dataset comprising all companies having both common and preferred stocks issued and traded on European markets between 2009- 2016, we determined the relationship of risk (measured by beta coefficients) and price volatility among common and preferred stocks and bonds in Europe. Our findings show beta coefficients of preferred stocks as systematically lower than beta coefficients of common stocks. Considering a difference of up to 10% as negligible, however, preferred stocks showed a similar or higher beta coefficient than corresponding common stocks of the same company in 53% of cases, whereas for 33% of cases, the difference is only ±10%. Coefficients of variation in prices showed a similar relationship, with only a negligible portion of preferred stocks bearing fixed (stable) dividends. This result implies that currently traded preferred stocks in Europe in fact do not possess such characteristics they are typically said to have, and in many cases they incur as comparable a risk as do common stocks. This essential information should help to increase the efficiency and competitiveness of joint-stock companies.

Hedging the Brazilian stock index in the era of low interest rates: What has changed?

In this paper we analyze the ability of different asset classes to hedge the Brazilian stock index in periods of high and low interest rates in the Brazilian economy, using two multivariate GARCH models. Our analysis includes two categories of assets: those traded in domestic currency and those traded in U.S. dollars. From the perspective of a local investor, we find that the exchange rate (R$/US$) and gold are the assets least correlated with equities. From the standpoint of a foreign investor, commodity index and fixed-income assets are the most useful. These results prevail in the low- and high-interest-rate periods. Moreover, in the period of low interest rates, the standard deviation of the estimated conditional correlation time series decreases, suggesting that in this period investors are more confident about macroeconomic policies.

An Analysis of Bank Fee and Commission Income in the EU and in the Czech Republic in a Low Interest Rate Environment

This paper deals with the European banking sector fee and commission income, with a special emphasis on the Czech Republic, in the 2007-2018 period. During this time span, net interest income was declining due to low nominal growth and a long period of low interest rates. We contribute to the literature when comparing the magnitude of fee income across the EU banking sectors. We come to the following key findings. First, we conclude that there is no single optimal fee income strategy. Second, we argue that Czech banks are not abnormally dependent on fee income and their outstanding profitability is rather connected with sound risk management as well as with sufficient liquidity and capital buffers. Third, we find that in the EU, fee income share followed an increasing trend after the 2007-2009 global financial crisis which might be connected with an effort to maintain desired profitability in a low interest rate environment.

Unter welchen Voraussetzungen sind Mindestzinsklauseln in Unternehmerkredit- oder -leasingverträgen zulässig?

Many banks and leasing companies have reacted to the current period of low interest rates, among other things, by including minimum interest clauses in their loan and leasing agreements. While there is already established supreme court jurisdiction for consumer credits, which can be used as a guide in legal practice, numerous questions are still unanswered in the context of mutual business-related legal transactions.

Efikasnost investicione politike i politike povećanja doprinosa u održavanju dugoročne fundiranosti sponzorisanih penzijskih planova

Defined benefit occupational pension plans are facing long-term challenges in maintaining the funding level required by the pension system regulation. During a relatively short period of just two decades, private pension funds have seen two financial crises (the dot.com crisis at the beginning of the 21st century and the Global financial crisis in 2008), the period of low interest rates following the global financial crisis, and more recently, the negative effects of the corona virus epidemic as well. In such environment, the question is which mechanism is the most efficient one in achieving and maintaining the adequate level of funding for defined benefit occupational pension plans. The paper's aim is to examine the efficiency of investment policies and the policy of increasing contributions in maintaining the long-term funding of the pension fund, by using the VAR model and bootstrap resampling for simulating the observed variables. The empirical results show that the investment policy is the most efficient tool for achieving long-term funding, together with limitations in terms of the aggressiveness of the investment policy.

The Dividend Disconnect

ABSTRACTMany individual investors, mutual funds, and institutions trade as if dividends and capital gains are disconnected attributes, not fully appreciating that dividends result in price decreases. Behavioral trading patterns (e.g., the disposition effect) are driven by price changes instead of total returns. Investors rarely reinvest dividends, and trade as if dividends are a separate, stable income stream. Analysts fail to account for the effect of dividends on price, leading to optimistic price forecasts for dividend‐paying stocks. Demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to lower returns for dividend‐paying stocks.

MONETARY POLICY WHEN THE ZERO LOWER BOUND IS WITHIN REACH: A SMOOTH TRANSITION REGRESSION APPROACH

The period of low interest rates since the global financial crisis provides a unique opportunity to examine monetary policy reaction functions near the zero lower bound (ZLB). Using smooth transition regressions for the Euro area and a panel of industrialized countries we show that central banks anticipate the ZLB by less aggressive policies in its vicinity while we do not find a significant difference between both regimes for the US.

Without looking closer, it may seem cheap: Low interest rates and government borrowing

Are periods of low interest rates advantageous times for governments to increase expenditure by issuing debt? Because borrowing costs are lower, some economists have argued that the answer is yes. We argue that the logic used in reaching this conclusion may in fact be too simplistic. Whether or not it is a good time to issue debt depends not on whether interest rates are low, but rather on why interest rates are low. We show that if interest rates are low because of an increased preference for saving, then fiscal sustainability allows increasing debt in a period of low interest rates. In contrast, if interest rates are low because of a decline in trend output growth, then it is not sustainable to increase deficit financed spending.

External funding of major capital projects in the UK Higher Education sector: issues of demand, supply and market timing?

ABSTRACTThe aim of this paper is to consider the sources of finance used to support major capital expenditure in the UK Higher Education sector and to reflect on any differences between traditional corporate finance theory and practice in the UK university sector. Utilising both HESA data returns and published annual accounts, an in-depth analysis using a logit structure is carried out on data from the top 63 UK universities over the period 2014–2017, to establish the range of funding sources adopted for major capital projects, all set within the context of the UK macro environment and a period of low interest rates. The research also carries out a survey of funders to understand the decision criteria used by lenders active in the Higher Education sector and a survey of university finance directors to determine the use of the funds, the reasons behind past lending decisions and to ascertain likely future demand for finance to fund major capital projects.