Life Below Zero: Bank Lending Under Negative Policy Rates

70 Pages Posted: 5 Jun 2016 Last revised: 26 Apr 2018

Florian Heider

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

Farzad Saidi

Swedish House of Finance; Centre for Economic Policy Research (CEPR)

Glenn Schepens

ECB -Financial Research Division

Date Written: April 17, 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 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 (April 17, 2018). Available at SSRN: https://ssrn.com/abstract=2788204 or http://dx.doi.org/10.2139/ssrn.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)

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Glenn Schepens

ECB -Financial Research Division ( email )

Frankfurt am Main
Germany

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