We have also seen little evidence that negative interest rates are undermining bank profitability, an issue which has caused a lot of concern. This would pose a financial stability risk to the extent that it hinders banks from building up capital through retained earnings and makes raising market equity too expensive. It would also affect monetary transmission for the same reasons.
In fact, net interest income has remained quite stable over the past two years, even as overnight rates have drifted lower. And thanks to gains in other income components, banks’ return on equity has been rising and is converging towards their cost of equity.