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Life Below Zero: Bank Lending Under Negative Policy Rates

69 Pages Posted: 5 Jun 2016 Last revised: 28 Sep 2017

Florian Heider

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Farzad Saidi

Stockholm School of Economics; Centre for Economic Policy Research (CEPR)

Glenn Schepens

European Central Bank

Date Written: September 22, 2017

Abstract

We show that negative policy rates transmit to the real sector via bank lending in a novel way. The European Central Bank's lowering of the policy rate into negative territory in June 2014 induces banks with more deposits to lend less and to riskier borrowers. Banks do not adjust loan terms, and the risk taking is concentrated in poorly capitalized banks. New risky borrowers appear financially constrained, and invest more after receiving a loan. Besides highlighting the role of bank net worth for the supply of credit, our results point to distributional consequences of negative rates in the banking sector.

Keywords: monetary policy, zero lower bound, negative interest rates, bank lending

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 22, 2017). Available at SSRN: https://ssrn.com/abstract=2788204

Florian Heider

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

HOME PAGE: http://https://sites.google.com/site/florianheider2/

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Farzad Saidi (Contact Author)

Stockholm School of Economics ( email )

Stockholm
Sweden

HOME PAGE: http://www.farzadsaidi.com

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Glenn Schepens

European Central Bank ( email )

Financial Research
Sonnemannstrasse 20
Frankfurt am Main, D-60314
Germany

HOME PAGE: http://https://sites.google.com/site/schepensglenn

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