Low interest rates threaten entire finance sector: Dutch central bank

800px-DeNederlandscheBank
. Picture: Wikimedia Commons/Kaihsu

Dutch central bank DNB is deeply concerned about the "profound consequences" the superlow interest rates will have on the entire financial sector, director of Supervision at DNB Jan Sijbrand said on Thursday, NRC reports. 

Insurers are already facing problems caused by the low interest rates. They are earning less and less on their investments of policyholders' premiums. This will eventually result in insurers having insufficient funds to fulfill their payout commitments, according to Sijbrand.

Banks are not seeing the problems yet, but unless they change their business model, problems are "inevitable", Sijbrand warns. The low interest rates puts banks' interest-income under pressure. So far banks managed to keep this income stable, partly by reducing savings rates significantly. But that is only a temporary solution.

Banks pay interest on savings, while earning money from interests on loans and mortgages. According to Sijbrand, banks can't keep lowering the saving rates, or even go into a negative savings rate, because it limits their room to maneuver. And at the same time, they earn less interest on new mortgages and loans, and from customers who renegotiate their mortgage.

The interest rate determined by the European Central Bank. The ECB is keeping the interest rate low in an effort to encourage Europe's economy. Though there is increasing criticism from both politicians and financial institutions on this policy.

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