Macroprudential policy issues arising from low interest rates and structural changes in the EU financial system : November 2016

The current macro-financial environment is characterised by exceptionally low, and even negative, nominal interest rates, which can have both a positive and a negative impact on the financial system and the economy. This report, in accordance with the mandate of the Task Force, discusses the sources, implications and potential vulnerabilities and risks for the EU financial system deriving from the low interest rate environment and ongoing structural changes in the financial system. The analysis considers two possible scenarios for future nominal interest rate trends over the next ten years: a protracted low interest rate environment accompanied by low growth ("low for long") and an economic recovery scenario under which interest rates rise gradually ("back to normal"). Each of the two scenarios makes different assumptions concerning the contribution of structural factors to the currently observed interest rate and growth trends. Quantitative evidence is provided, wherever possible, to support the analysis. The report proposes a holistic macroprudential policy approach aimed at enhancing financial stability and mitigating systemic risks in the low interest rate environment. This includes an assessment of risks, implications for the broader economy and considerations about the market structure in view of the Action Plan on Building a Capital Markets Union.