After all, credit institutions’ business models – and hence their earnings, too – are heavily reliant on interest income, especially when it comes to small and medium-sized institutions. This is, to a certain extent, a natural consequence of the function they perform in the economy, but is also a strategic decision in some cases. There are two main factors behind the income squeeze.
First, higher-yielding legacy loans are maturing and being replaced by ones generating lower returns. Second, profits are falling because the spread between short-term and long-term interest rates is currently relatively narrow. Added to this is the fact that deposit-based funding is significantly less attractive than it once was. The reason?