To the extent that they cannot meet target returns, it will be harder for them to accrete capital to build resilience. Although the NIM effect has been present for some years now, we have not yet seen a broadly based move by banks in advanced economies to push up returns by taking on greater risk. Post crisis regulation has almost certainly played a role in constraining aggressive search for yield behaviour, as perhaps have banks’ memories of the crisis. 8 For example, using the data for banks from 47 countries from 2005 to 2013, Claessens et al (2018) find that a 1 pp fall  in interest rates implies an 8 bps lower NIM – compared to 20bps at low rates. 9 In the euro area, NIMs are very low at around 130bps and retail-focused German savings banks in particular have seen their NIMs fall by 40bps since the ECB introduced negative rates in 2014. In the United Kingdom, NIMs are higher at around 230bps and have remained relatively stable over the past few years, supported by higher policy rates and the more international focus of major UK banks. 10 Low current and expected profitability appears to be the main driver of banks’ equity prices. There is little evidence that investors are concerned about asset quality: the proportion of banks’ loans that are non-performing and credit default swap premia remain low. 6  All speeches are available online at www.bankofengland.co.uk/news/speeches  6  But more recently we started seeing some evidence of search for yield behaviour.
31  16  All speeches are available online at www.bankofengland.co.uk/news/speeches  16  But real returns on the Navy Fives and similar fixed rate securities continued to be highly volatile reflecting the very large swings in inflation for much of period – a period that was punctuated by frequent financial crises. That perhaps illustrates that there is a great deal more to stability - both financial and monetary - than nominal interest rates. 17  All speeches are available online at www.bankofengland.co.uk/news/speeches  17  References Anadu, K., M. Kruttli, P. McCabe, E. Osambela and C.H. Shin (2018), The shift from active to passive investing: Potential risks to financial stability?, Working Paper PRA 18-04, Federal Reserve Bank of Boston. Andersen, A., C. Duus, and T. Jensen (2016), Household debt and spending during the financial crisis: Evidence from Danish micro data, European Economic Review, 89, pp. 96-115. Avery Jones, J. (2019), Jane Austen’s income: insights from the Bank of England archives, Bank Underground Blog, 2 August 2019 Bank of England (2019), Financial Stability Report, Issue No. 45, July 2019.Bank of England (2018), Inflation Report, August 2018. Bank of England (2017a), Stress testing the UK banking system: key elements of the 2017 stress test, March 2017. Bank of England (2017b), Financial Stability Report, Issue No 42, November 2017. Borio, C. (2017), Secular stagnation or financial cycle drag?, Keynote speech, National Association for Business Economics, 33rd Economic Policy Conference.