In the last part of the research, there won’t be much of my input. We’ve already gone through three different equally important sectors and related issues: banks, pension funds, and insurance companies. You can read about the first part about banks and savers here:

And the second part about pensions and insurers here:

Those institutions are the core of the financial system and any of their problems may pose significant risk to the financial stability. Unsurprisingly due to reasons mentioned in the previous articles this risk has substantially increased over the last several years and been highlighting by the largest financial institutions in the world and their authorities. Using the opportunity, therefore, I cite the most important of them.

One of the first warnings came in February 2016 from Mark Carney, Bank of England Governor Chairman of the Financial Stability Board from 2011 to 2018:

“While negative rates might be an attractive way for an individual country to weaken their currency and boost exports, the world economy will suffer as a whole. They help to push economic activity around the globe, but do nothing to boost it. “

In March 2016 the Bank for International Settlements, the so-called Central Bank of Central Banks wrote:

“Looking ahead, there is great uncertainty about the behaviour of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period.”

Subsequently, in August 2016, the World Bank Researchers wrote: 

NIRP [Negative Interest Rates Policy] could pose risks to financial stability, particularly if policy rates are substantially below zero or if NIRP are employed for a protracted period of time.”

In August 2018, European Central Bank’s researchers released a paper

“Life below zero: bank lending under negative policy rates”, which concluded that

“Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding.”

In October 2019 Financial Times reported that the International Monetary Fund’s managing director, Kristalina Georgieva has asked staff to look more closely at the risks of negative interest rates for the world economy amid synchronized slowdown of the global economy.

“Ms Georgieva noted that there could be unintended consequences as central banks push interest rates deeper into negative territory.

At the beginning of October, a group of former European central bankers has published a memorandum on the European Central Bank Policy:

Jacques de Larosiere, a former governor of the Bank of France
Herve Hannoun, a former first deputy governor of the Bank of France
Otmar Issing, a former member of the ECB’s Executive Board
Klaus Liebscher, a former governor of the Austrian central bank
Helmut Schlesinger, a former president of Germany’s Bundesbank
Juergen Stark, a former member of the ECB’s Executive Board
Nout Wellink, a former governor of the Dutch central bank

Saying among others:

The negative impact of the ultra-low interest environment extends from the banking system, through insurance companies and pension funds, to the entire financial sector. The re-distribution effects in favour of owners of real assets, create serious social tensions.”

“The longer the ultra-low or negative interest rate policy and liquidity flooding of markets continue, the greater the potential for a setback. Should a major crisis strike, it will be of very different dimensions than those we have seen before.”

At the same time, Ms Georgieva again warned that:

Prolonged low rates also come with negative side effects and unintended consequences. Think of pension funds and life insurance companies that are taking on more risky investments to meet their return objectives.”

In the IMF’S Global Financial Stability Report issued in October, the institution wrote:

 “Pension funds and insurers that used to act as a stabilizing buffer in financial crises are now part of the problem and might next time join the panic rush for narrow exits. This could amplify any shock very quickly and this, in turn, would lead to a full-blown credit crunch.”

This is actually one of the most scary warnings in recent years, as the credit market is the most important part of the financial system.

This is, of course, a consequence of negative rates which pushed pensions and insurers for riskier investments. Further in their report, the IMF estimates:

 “That pension plans have doubled their allocations to illiquid, alternative assets over the past decade. With more money tied up this way, pension funds may not be able to play their traditional role as market stabilisers in the future.

One extreme example is that some pensions hold in their portfolios Argentine government bonds, the country which is on a brink of the bankruptcy and has bankrupted 6 times over the last 100 years.

Other worrying comments came from two members of the European Central Bank, Ignazio Visco and Robert Holzmann, who have expressed concerns about the negative rate policy in the Eurozone, fearing of "unintended consequences on the region's financial system.”

In mid-November, the European Central Bank issued a semi-annual Financial Stability Review wherein one of the conclusions said:

“Low-interest rates have encouraged excessive risk-taking by investment funds and insurers as well as in some real estate markets.”

In addition to the review, the ECB Vice President Luis de Guindos stated:

“While the low interest-rate environment supports the overall economy, we also note an increase in risk-taking which could, in the medium term, create financial-stability challenges.”

In the second part of November, the Organization of Economic Co-operation and Development (OECD) issued a warning saying:

“Sustained negative interest rates at longer maturities would likely incentivise insurers and pension funds to rebalance their portfolio from safe assets into risky assets, with ensuing risks for their clients,” “This would increase the chances of incurring financial losses, in particular during a downturn.”

Similarly, during that time, the World Bank and the International Monetary Fund have pointed out at two important things:

“A global economic slowdown driven by “policy shocks” that might have been avoided, and the risks to pension funds, banks, and overall financial stability posed by the roughly $15 trillion, estimated by the IMF, in bonds that now pay a negative interest rate.”

It is worth to note that more than 95% of negative-yielding bonds are held by central banks and other financial institutions like pension funds, banks and insurance companies.

At the same time, and this is the last quote here, governor of the Central Bank of Iceland, Ásgeir Jónsson said:

Negative interest rates may be hiding deep underlying problems and they’re a sign of sickness for developed economies.”

As you can see, authorities are fully aware of approaching problems and their consequences, the question is what are they going to do about that?


We finally went through all parts of this comprehensive research. There are probably many factors that I did not include in the articles which would certainly affect our pockets. One example, just briefly mentioned in the warnings is how investors are forced to take larger risks to maximize returns due to low or negative interest rates. This in effect disrupts the entire business cycle and eventually decreases the stability of the system.

Financial stability is a pivotal factor for everyone because when the credit or any other type of crisis approaches then the governments will again use our money through taxes to bail-out struggling or bankrupting financial institutions. Not even talking about several million people losing their jobs. It has happened before with the Troubled Asset Relief Program (TARP) - US government program to purchase toxic assets and equity from financial institutions in order to rescue them during the last financial crisis. Originally the program’s amount was $700 billion (then reduced to $475 billion). However, according to one of Forbes’ articles written by Mike Collins in 2015, the Special Inspector General for TARP reported that the total commitment of the government was $16.8 trillion dollars with the $4.6 trillion already paid out. It is an equivalent of 92% of the 2015 US GDP.

In addition, Bloomberg reported several years ago that the Federal Reserve has had committed  $7.77 trillion via asset purchases plus lending, to rescue the financial system.

What’s more, in one of the papers the Levy Institute at Bard College calculated, that this number was in excess of $29 trillion (including lending guarantees and other forms of aid). Those numbers are unbelievably high and even if they are not fully true they give food for thought.

I’d like to conclude this series with the quote of British financial journalist Ambrose Evans-Pritchard, who in the Telegraph’s article “IMF fears the world's financial system is even more destructive than in 2008”, wrote:

“Quantitative easing, zero interest rates, and financial repression across the board have pushed investors - and in the case of pension funds or life insurers, actually forced them - into taking on ever more risk. We have created a monster.”

Stay safe!