Banks Must Prepare Now for Prospect of Negative Rates
By Karen Shaw Petrou

When central bankers discuss the prospect of negative interest rates, it sounds like the doctoral dissertations they wrote decades ago — highly theoretical and sometimes almost theological discourses on what would happen to growth and inflation, with nary a thought to financial stability. But with some at least toying with the concept of negative rates to accelerate economic growth, and other countries already taking that step, U.S. bankers should begin reckoning with the impact. To be fair, the chance of U.S. policymakers lowering rates below zero is low under normal market circumstances because most members of the Federal Open Market Committee want to keep rates well above the zero lower bound, or ZLB. But any false sense of security that rates will never go negative was shattered by the Fed’s most recent stress test scenarios, which require large banks to wargame their ability to withstand adverse hypothetical conditions. The “severely adverse” scenario includes short-term Treasury rates that fall below zero for sustained periods, with a virtually flat yield curve making the scenario still more challenging.