More than 80% of financial institutions not prepared for negative US interest rates

Some 84 percent of financial institutions would not be prepared to operate immediately in a negative US interest rate environment, according to a recent survey conducted by the Risk Management Association (RMA).

While 70 percent of respondents think the probability of a negative rates policy is below 10 percent, RMA is urging financial institutions to make the necessary preparations for a possibility that cannot be discounted.

“Negative rates in the US are unlikely for now, but definitely not impossible at some point,” said Nancy Foster, president and chief executive officer of RMA, a not-for-profit, member-driven professional organisation whose purpose is to advance the use of sound risk management principles in the financial services industry.

“Now is the time for banks to think the unthinkable and get ready for something that has already happened in other major economies. RMA and its councils stand ready to support our members in planning for a day when the unthinkable becomes the inevitable.”

For the survey published in its whitepaper, “Focus on the Negatives: Banks’ Assessment of the Potential for a Negative US Rates Policy–And Their Preparedness”, RMA polled 47 financial institutions, ranging from global to regional, and found that many currently lack the technical capacity to accommodate negative rates.

Its survey also revealed that 75 percent of respondents would be ready within one year and that many agree with the widely-held assumption that the US Federal Reserve would give advance warning of a negative rates policy, although estimates of the length of that warning period vary.

A strength for many firms is the inclusion of negative rates scenarios in their modelling: 60 percent of respondents to RMA’s survey say their software and systems are able to handle negative rates across five classes of models and scenarios.

RMA recommends that financial institutions take immediate action to prepare for negative rates, such as conducting a formal readiness assessment, ensuring that third party vendors are prepared, and establishing a remediation plan, where needed.

While the whitepaper recognises that a negative rates policy in the US is considered unlikely, it recommends that financial institutions prepare for the “not trivial” possibility.

The survey was conducted from June through July 2020 in collaboration with RMA’s Global Markets Risk Council. The whitepaper, including the survey, can be downloaded here.