Risks to Financial Stability in the Low Interest Rate Environment and its Housing Market Implications: CE Region Study

• Název práce v češtině: Rizika pro finanční stabilitu v prostředí nízkých úrokových sazeb a vliv na trh nemovitostí: studie regionu Střední Evropy
• Název v anglickém jazyce: Risks to Financial Stability in the Low Interest Rate Environment and its Housing Market Implications: CE Region Study
• Klíčová slova: nízké úrokové sazby, EURIBOR, finanční zdraví, GMM, obytné nemovitosti, hypotéky
• Klíčová slova anglicky: low interest rates, EURIBOR, financial soundness, GMM, residential property, mortgages
• Akademický rok vypsání: 2017/2018
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: doc. PhDr. Adam Geršl, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 01.06.2018
• Datum zadání: 16.07.2018
• Datum a čas obhajoby: 16.09.2020 09:00
• Místo konání obhajoby: Opletalova - Opletalova 26, O105, Opletalova - místn. č. 105
• Datum odevzdání elektronické podoby: 30.07.2020
• Datum proběhlé obhajoby: 16.09.2020
• Oponenti: Mgr. Petr Polák, M.Sc., Ph.D.

Zásady pro vypracování

The current state of the prolonged low interest rate environment continues to pose a great threat to the
soundness of the financial system. The low interest rate phase, as a permanent feature of the markets, has left
room for the emerging of new risks and encouraged a structural change in the financial system. Previous
literature on the topic discuss technology and demographics-driven structural changes of post-Great Recession
accommodative policies which have established slow to moderate economic growth and low interest rates,
creating what is known as the “new normal” economy.
A publication of the IMF as of 2016 analyzes what are the short-term to medium-term risks and their implications
for the economy, namely. Furthermore, there are indications of how the Central Banks should provide monetary
stimulus on their outlook of growth. Given that this is the “new normal” economy, financial stability vastly depends
on how financial institutions accustom to the above mentioned, according to the IMF. This situation challenges
the current business models and lead to fundamental changes in them.
A prolonged period of low interest rates will appeal banks to take greater risks, in their attempt to remain
profitable. As for the risk-taking channel, banks have certainly increased their risk appetite due to the low interest
rate environment and this constitutes a risk itself, yet the extent to which banks expose themselves to risky
investments with higher yields is hardly investigated (Bikker & Vervliet, 2017). Low-for-long interest rates also
raise the present value of existing long-term liabilities (Shiller, 2007).
Furthermore, low interest rates are leading to a marked increased in asset prices. One of the recently identified
risks of the low interest rate environment, which the study will take into consideration, is a notable pickup in
mortgage lending and house prices which increases the risk of a possible bubble in lending and real estate
market that - were it to burst at a later stage - could have a detrimental effect on banks, borrowers, markets, and
in effect also on the real economy. It is of great importance that the risks must be properly identified and
addressed.
I am motivated in writing on a very current and persistent issue in the fields of Economics and Finance, hoping to
contribute to existing literature on the topic.

Seznam odborné literatury

Bikker, J., & Vervliet, T. (2017). Bank profitability and risk-taking under low interest rates. DNB Working Paper.

Borio, C., & Gambacorta, L. (2017). Monetary policy and bank lending in a low interest rate environment: Diminishing effectiveness? Journal of Macroeconomics,54, 217-231. doi:10.1016/j.jmacro.2017.02.005

Corradin, S., & Fontana, A. (2013). House price cycles in Europe. Retrieved from https://ideas.repec.org/p/ecb/ecbwps/20131613.html

ESRB. (2016). Macroprudential policy issues arising from low interest rates and structural changes in the EU financial system.

Egert, B., Mihaljek, D. (2007). Determinants of house prices in Central and Eastern Europe. Comparative Economic Studies, 49(3):337-489.

Glaeser, E. L., & Nathanson, C. G. (2014). Housing Bubbles. Retrieved from http://www.nber.org/papers/w20426

Hildebrandt, A., Martin, R., Steiner, K., & Wagner, K. (2013). Residential Property Markets in CESEE EU Member States. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2305109

IMF. (2016). Low Growth, Interest Rates Impact Financial Stability. Retrieved from http://www.imf.org/en/news/articles/2016/10/04/am16nagfsr100416

Land and residential property markets in a booming economy: New evidence from Beijing. (2007). Retrieved from https://www.sciencedirect.com/science/article/pii/S0094119007000708

Shiller, R. (2007). Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models. doi:10.3386/w13558

Sutton, G. D., Mihaljek, D., & Subelyte, A. (2017). Interest rates and house prices in the United States and around the world.

Aydemir, R., & Ovenc, G. (2016). Interest rates, the yield curve and bank profitability in an emerging market economy. Economic Systems, 40(4), 670-682

Předběžná náplň práce v anglickém jazyce

Hypotheses:

H1: Low interest rates set by ECB increase house prices in the CE region.
H2: A higher take of adjustable rate mortgages is associated with greater increase in house prices.
H3: Low interest rates set by ECB increase mortgage lending in the CE region.
H4: Low interest rates deteriorate bank profitability in the CE region.


Expected Contribution:
The study will use data on mortgage loans and house prices across a sample of countries in a long period of time to
capture the whole financial cycle and to assess whether the current pickup is extraordinary compared to previous
pickups or not. The contribution of the thesis will also be the collection of data from different sources and their
comprehensive analysis.