Master's Theses

Date of Award

2016

Document Type

Thesis

First Advisor

Heidi Zhao

Second Advisor

Kevin Forster

Keywords

banks, interest rates, economy, risk

Abstract

This research paper deals with the impact of interest rate levels on banks’ openness to risk. There are several interest rates in the economy, which have different impacts of banks profit situations. This makes it necessary for banks to come up with the right strategy to ensure financial profitability. This research paper intends to find out the correlation between interest rate levels and risk behavior. An all-time low interest rate level characterizes the current situation in the economy. This situation deals as the focus of this research project. It makes business for financial institutions much harder compared to high interest rate levels, since it is more difficult to generate profits, due to low margins. The first finding of this research paper is that there are different ways banks respond to a change in interest rate levels. To compensate the decrease in profits generated from margins, banks have to find new ways. One way is to enter new, more profitable business fields such as infrastructure projects, which are connected with more risk though than the business with private customers. However with focusing on the private banking sector it could be found out, by analyzing statistical data from the Federal Reserve, hat there is no increase in risk taking with low interest rates. Since the financial crisis, the point when interest rates started to decrease, the amount of issued loans increased. At the same time charge-off and delinquency rates declined. This indicates that fewer customers default in paying back their loans, due to stricter regulations in the credit business. Another finding of the research paper is that there is another challenge for banks next to low margins, which is the increase in competition due to the rise of non- and nearbanks. Customer acquisition has become much harder and customer loyalty II decreased, because customers have become more price sensitive and there is more supply in financial products, where they can choose from. These findings are based on secondary data, mostly in form of books and academic journals. Then they are confirmed with the analysis of primary data, consisting of statistical data on the financial sector. To generate more specific information, two sample companies have been chosen and analyzed. First, by looking at statistical data on their financial situation and secondly by attaining subjective opinions of companies’ representatives in the form of interviews. Recommendations for companies in the financial sector are given at the end of this research project and are based on the findings from the secondary and primary research. However it is difficult to give concrete recommendations since the financial sector is subject to a large number of standards and regulations. What can be said is that they have to be innovative and have to find alternative ways to attract and keep customers in order to keep their business profitable.

Included in

Finance Commons

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