Australia, New Zealand, Thailand and Korea are facing near-zero rates for the first time, whilst Japan, Singapore and Hong Kong all have prior experience with ultra-low rates. These markets’ differing characteristics will affect how ultra-low rates will eventually manifest it. Efforts to boost revenue may also increase risk appetite, with most banks to focus on containing growth of total risk-weighted assets, but ratings may be badly hurt if the higher risk appetite is not matched by appropriate strategies to manage or absorb credit risk losses.
Low rates rates would normally underwrite asset quality but may be inadequate given the pandemic-led economic shock. It may also further shift banks’ funding bases towards longer-term fixed-rate debt and deposits. Furthermore, it could also have indirect effects on ratings as fiscal policy has become a key tool for managing economic cycles, which may affect sovereign ratings. More broadly, the lack of experience most authorities have in wielding monetary policy at the ZLB may increase uncertainty and longer-term risks for banking sectors.