A persistent global trend of zero-bound interest rates and low growth could cause an overhaul of the financial sector, according to the 2017 Global Financial Stability report by the International Monetary Fund (IMF).
The current economic trends, mainly caused by an ageing population and decreasing productivity, could structurally change financial institutions on a global scale, thereby changing the way they conduct business.
The report finds that low interest rates may benefit banks in the short run as they are able to provide a steady supply of credit to the economy.
However, in the long run, unsustainable levels of low interest rates will adversely affect the profitability of banks.
As banks take a hit in their margins, they will lean towards riskier investments that yield higher interest rates.
Smaller banks will not be able to stay operational and will most likely be consolidated into larger banks.
The make-up of the financial sector as a whole would also change, as an ageing population would require the services of asset managers more than banks, causing the former to become more competitive.
Low interest rates would also make insurance policies and pension funds less attractive. People would likely prefer a defined contribution pension plan over a defined benefit pension plan.
The report also suggests some policy measures in order to deal with the overhaul of the financial system.
With an increasing M&A activities between banks, proper legal and regulatory frameworks for bank consolidation need to be instituted. Asset management firms need to be put under greater scrutiny and more regulatory policies need to be imposed upon them as demand for their services increases.
As demand for insurance and pension firms wane, incentives to strengthen their economic solvency requirements must be implemented in order to insure that their obligation to clients are met.
The report has not found a concrete answer to whether the current economic climate is temporary or the new normal.