401955088265000146685088265000An after-crisis analysis of the effect of protracted low interest rate on Date24-10-2014
Course 4.1 Advanced Finance, Banking & Insurance
LecturerProf. Dr. D. Schoenmaker & Dr. P.J. Wierts
Management SummaryThe lowering of the interest rates by the ECB is meant to achieve and maintain the desired inflation rate of 2%. This is done to ensure price stability in the Eurozone. Then again, doing so affects financial institutions as well, first and foremost banks. Banks in general use these rates in deciding their lending rate, an important part of their business. Deutsche Bank is no exception in this respect as we conclude in this paper. Based on such monetary policy decision-making Deutsche Bank …show more content…
In these years the ECB lowered the interest rate. By focusing on these years only we try to isolate the effect of the low interest rate on Deutsche Bank, in order to prevent creating a rippling effect from the preceding financial crisis.
TheoryThe European Central Bank (ECB) has several instruments in order to affect the inflation in the Eurozone. The interest rates at which regional central banks can lend or deposit their money is one of these instruments (De Haan, Oosterloo, & Schoenmaker, 2012). According to De Haan et al. (2012), changes in the central bank’s interest rate may affect the supply of credit through at least four channels, of which the first three are part of the credit channel:
Bank lending channel
Balance sheet channel
The structure of this report has been built upon the four channels mentioned above. In Accordance with these channels, we have set up hypotheses in order to test our theory-based expectations with the actual proceedings of the Deutsche Bank. Moreover, in order to get a clear view of the current situation and its implications for the future policies of the Deutsche bank and its business model, we analyzed the occurrence of a similar situation. We looked at the Japanese banking industry, which had to deal with low interest rates for more than a decade (Weistroffer, 2013).
Bank Lending ChannelCurrently, the European economy faces a problem of
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In England, the party responsible for setting the short-term interest rate is called the Monetary Policy Committee, or MPC. The channels through which the interest rate that the MPC sets affect the economy and affect inflation, are often referred to as the transmission mechanisms of monetary policy. In this essay, which summarizes the paper called “The transmission mechanism of monetary policy”, the Bank of England illustrates the transmission mechanisms that the MPC believes to be true. The paper “The transmission mechanism of monetary policy” is divided into two
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