Negative Interest Rates Have ‘Detrimental Impact’ on Banks & Customer Behavior: Swiss Regulator

  • Crypto assets “accentuate” money laundering risks – FINMA
  • “Persistently low-interest rates” affecting three areas – banks profitability, consumer behavior, and business models

Switzerland’s financial regulator FINMA in its “Risk Monitor 2019” report while talking about the low interest-rate environment, cyber-risks, and market access also covered the risks posed by the cryptocurrency market in its money laundry section.

The Swiss financial centre it says has been a wealth management hub which makes it “particularly exposed” to money laundering risks.

The Swiss Financial Market Supervisory Authority which is responsible for financial regulation says apart from the traditional money-laundering risks, the financial industry is now also facing risks in the area of blockchain technology and crypto-assets. An area that it says is attracting growing interest from clients.

These new technologies, FINMA says promise efficiency improvements in the financial industry but at the same time, they “accentuate” the threats posed by terrorism financing and money laundering.

Greater potential anonymity and speed and cross-border nature of transactions are the factors contributing to these risks. Malpractice by the financial institutions active in Fintech, the regulator says could,

“significantly damage the reputation of the Swiss financial centre and slow down the development of digitalization.”

FINAM says, in the area of digital assets they are taking a “technology-neutral approach” but requires institutions to comply with the same high standards that apply in the other businesses.

Impact of Negative Interest Rates

FINMA also touched upon “persistently low-interest rates” in Switzerland and the European Union (EU) over the short and long term horizons.

These interest rates in Switzerland, Japan, and Germany have been dropped into negative territory that is now having a “detrimental” impact on the profitability of institutions. The situation further increases the risk of asset price bubbles.

The interest rate in Switzerland first tumbled below zero in 2011 that started with short and medium maturities but then in July 2019 these extended out to 50 years. Also, mortgage interest rates hit record lows in 2019.

The potential results of this effect three areas, one being pressuring the profitability of banks by eroding the net interest margins. Though hard to predict customer behavior would be affected that could also “jeopardize” customer deposits as a stable source of funding for banks. If the rates were to stagnate for a very long time, FINMA says it would pose a risk to certain business models such as life insurers as well.

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