Home Economy Banks, insurers may suffer if U.S. gets stuck in a low-interest-rate economy, IMF says

Banks, insurers may suffer if U.S. gets stuck in a low-interest-rate economy, IMF says

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         Banks, insurers may suffer if U.S. gets stuck in a low-interest-rate economy, IMF says

U.S. banks and insurers would suffer if the U.S. gets stuck in an extended period of low interest rates similar to Japan’s recent history, researchers at the International Monetary Fund said Thursday.

“Despite recent signs of an increase in long-term yields, particularly in the U.S., the experience of Japan suggests that an imminent and permanent exit from a low-interest-rate environment need not be guaranteed,” the study said.

Economists now believe that Japan’s sluggish economy since the 1990s has a lot to do with its aging population. And the U.S. is facing its own wave of retirees from the baby boom generation.

St. Louis Fed President James Bullard already believes the U.S. is stuck in a low-growth, low-rate world that is unlikely to change.

“If lower rates are accompanied by flatter yield curves, banks and life insurers are likely to suffer,” the study said.

Smaller, geographically undiversified, deposit-funded banks would be hurt the most, the report said, and this could set off more consolidation in the sector.

Big banks are likely to take on riskier positions by investing in foreign countries, like emerging markets, that offer higher returns and rely more on wholesale funding markets to do so, the report said.

“Life insurers and pension funds would face a long-lasting transitional challenge to profitability and solvency, which is likely to require additional capital,” the IMF said. They would cede some of their savings business to asset managers and banks over the long-term.

Regulators would have to respond, the study concluded.

Bank regulators would have to limit excessive risk taking in an environment of lower expected returns.

Insurance and pension regulators should implement economic solvency requirements. And oversight of asset management activities should become more important, the IMF said.

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