Life Below Zero: Bank Lending Under Negative Policy Rates

Review of Financial Studies, 32, 3728-3761 (2019)

65 Pages Posted: 5 Jun 2016 Last revised: 24 Apr 2020

See all articles by Florian Heider

Florian Heider

Leibniz Institute for Financial Research SAFE; Goethe University Frankfurt; Centre for Economic Policy Research (CEPR)

Farzad Saidi

Boston University - Questrom School of Business; Centre for Economic Policy Research (CEPR)

Glenn Schepens

European Central Bank (ECB)

Multiple version iconThere are 3 versions of this paper

Date Written: September 19, 2018

Abstract

We show that negative policy rates affect the supply of bank credit in a novel way. 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. Our results suggest that negative rates are less accommodative, and could pose a risk to financial stability, if lending is done by high-deposit banks.

Keywords: negative interest rates, deposits, zero lower bound, bank balance-sheet channel, bank risk-taking channel

JEL Classification: E44, E52, E58, G20, G21

Suggested Citation

Heider, Florian and Saidi, Farzad and Schepens, Glenn, Life Below Zero: Bank Lending Under Negative Policy Rates (September 19, 2018). Review of Financial Studies, 32, 3728-3761 (2019), Available at SSRN: https://ssrn.com/abstract=2788204 or http://dx.doi.org/10.2139/ssrn.2788204

Florian Heider

Leibniz Institute for Financial Research SAFE ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt, 60323
Germany

Goethe University Frankfurt ( email )

Finance Department
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Farzad Saidi (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Glenn Schepens

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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