Trading business mainly consists of purchasing and selling securities on behalf of clients or for the bank’s own account. The current low interest rate environment can affect these three pillars in different ways. On the one hand, lower interest rates could plausibly benefit commission and trading business. Customers might be inclined to shift their portfolios into riskier investments, which would be conducive to earnings in these business areas. At the same time, a decline in interest rates leads to one-off valuation gains on securities in the balance sheet. On the other hand, it is likely that exceptionally low interest rates negatively impact banks’ interest rate margins. Put simply, the interest rate margin is the difference between banks’ interest income and interest expense, shown as a percentage of banks’ assets. To better understand the relationship between the interest rate level and interest rate margin, it is worth looking at the composition of the latter. The interest rate margin can be divided into three components, namely the asset, structural and liability margins (slide 4). The asset margin is the difference between the interest rate charged on loans and a market interest rate of equal maturity. The liability margin is the difference between a short-term market interest rate and the interest paid on deposits and other sources of financing. And finally, the structural margin is the difference between longer and short-term market interest rates – essentially the compensation the bank receives for maturity transformation.
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