In the short-term, low interest rates can be beneficial to banks by reducing funding costs, increasing asset prices and lowering default risk. However, a prolonged period of low interest rates could pose significant challenges to banks’ business models and profitability. New Zealand banks operate rather ‘vanilla’ business models focussed on intermediating between borrowers and savers to generate the majority of their revenues.
New Zealand banks are also heavily reliant on retail deposit funding. An extended period of low interest rates may cause the yield curve to flatten. This compresses banks’ net interest margin – the See RBNZ press release, ‘Financial system sound, and Reserve Bank providing additional support’, 16 March 2020: https://www.rbnz.govt.nz/news/2020/03/financial-system-sound-and-reserve-bankproviding-additional-support.