With interest rates declining further and retail bank deposits remaining sticky, banks’ interest margins continue to narrow, reducing their profitability. Going forward, this may reduce their willingness to lend. A related concern is that the reduced profitability prospects encourage banks and other financial institutions to take excessive risks and build up leverage.
BALANCE BETWEEN BENEFITS AND COSTS INCREASINGLY LESS FAVOURABLE Importantly, the longer our non-standard policies last, the larger the side-effects are expected to be. Fortunately, the improved economic outlook reduces the need for additional monetary stimulus.