|FOCUS18/07/20191FOCUS|EUROZONE18July2019ALMhedginglikelytointensifytherallyKEYMESSAGESFallinginterestratesinEuropearechallengingbanks’ALMmodelswithincreasingmismatches,particularlyforretailbanking.Banksareactivelyreceivinglongswapsinthe10+-yearsectors.Webelievethisislinkedtothehedgingofnon-maturingdepositslinkedtoretailaccounts.Asratesgolowerandcurvesflatten,coredepositsincreaseinsizeand“modelled”maturityincreasesbanks’ALMhedgingneeds.Ifloangrowthdoesnotaccelerate,bankswillbepushedtohedgelongerandlongerwithratesfalling,inourview.Banksarecomplexinstitutionswithnumeroussourcesoffundingandtypesofinvestment.Theconsumersegmentofbanksintheeurozoneisoneofthelargest,representing23%ofliabilities(deposits)and19%ofassets(loans),accordingtotheMay2019ECBStatisticsBulletin.FallinginterestratesinEuropearechallengingbanks’assetliabilitymanagement(ALM)modelswithincreasingmismatches,particularlyfortheirretailoperations.PleaserefertoimportantinformationattheendofthisreportFig.1:EUhouseholdloansvsdeposits(EURtrn)Source:ECBG10INTERESTRATESKaushikBanerjee,HeadofGlobalMacroResearch,|BNPParibasLondonBranchRetailbankingcarriesuniquerisksunlikecorporatebankingandmonetaryfinancialinstitutions(MFIs).Assetsandliabilitiescreatedviahouseholdscarryoptionalityunlikeoriginationfromothersegments.Thebulkofhouseholdliabilities(deposits)istermedasnon-maturingdeposits(NMD),astheydonothavefixedmaturities.Sincebanksarereluctanttopassonnegativeratestoretailcustomers,thereisanimpliedfloorof0%onhouseholddeposits,unlikecorporateandMFIdeposits.Ontheassetside,householdshaveanoptiontoprepay(orrefinance)mortgageandconsumerloans.Asinterestratesfall,therearetwomajoreffectsonthehouseholdassetandliabilitysideofeurozonebanks.Ontheassetside,loansareprepaidorrefinanced,leadingtoalossofincomeasloansareeitherextinguishedorifrefinanced,thecouponsareadjustedtolowermarketlevels.Ontheliabilityside,thereisempiricalevidencethathouseholddepositgrowthacceleratesasinterestratesfallintonegativeterritory.Inthisnote,wefocuson...
