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The FT argues that "In a negative carry world – or a flat yield environment - there is no role or purpose for banks because banks are forced into economically destructive practices in order to stay profitable.” Paul Krugman then points out that “a major source of the urge to hike interest rates despite low inflation is the self-interest of bankers, whose profits suffer in a low-rate environment.”...mmmmhhhh what a suprise
Well, none other than Paul Krugman draws attention on Friday to the fact that “a major source of the urge to hike interest rates despite low inflation is the self-interest of bankers, whose profits suffer in a low-rate environment.” To support the thesis Krugman draws attention to the following passage from the BIS’ new paper on the influence of monetary policy on bank profitability. What the BIS is saying is that the spread between the market rate and the rate at which deposit rates can be raised — and capital essentially skimmed without over stressing the economy — is entirely dependent on the oligopolistic discipline of the banks. It is this discipline which in turn determines the “retail deposits endowment effect” which in turn determines the “capital endowment effect” for the capital system as a whole.
unknownx500
