Falling oil prices and the risk of a global slowdown or recession weighed on stocks from the start, but banks have performed especially poorly as central bank policies have increased their risk.
Negative interest rate policies in Europe and Japan are a likely culprit in the bank rout. The European Central Bank and the central banks of Switzerland and Denmark have had negative policy rates for some time. Given still weak inflation, investors believe they will all take their policy rates further into negative territory. The Bank of Japan recently surprised the market by announcing a negative rate policy after holding its policy rate near zero for two decades. These policy actions reminded investors that many central banks have run out of tried and true tools to stimulate their economies.
This caused long-term interest rates across the globe to fall dramatically and the yield curve – the difference between long-term and short-term yields – to narrow or flatten. A flat yield curve makes it difficult for banks to make a profit on the spread between lending and deposit rates. It also makes it more difficult for insurance companies to offer attractive yields in annuities and other accumulation products.
