Adapting lending policies in a “negative-for-long” scenario

65 Pages Posted: 30 Apr 2018 Last revised: 4 Jul 2022

See all articles by Oscar Arce

Oscar Arce

Banco de España

Miguel Garcia-Posada

Banco de España

Sergio Mayordomo

Banco de España

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 9, 2021

Abstract

What is the long-term impact of negative interest rates on bank lending? To answer this question, we construct a unique summary measure of negative rate exposure by individual banks based on exclusive survey data and banks’ balance sheets and couple it with the credit register of Spain and firms’ balance sheets to identify this impact on the supply of credit to firms. We find that only when deposit rates reached the zero lower bound (ZLB) did banks adversely affected by the negative interest rates decrease their supply, especially when undercapitalized and lending to risky firms. Hence, the adverse effects of the negative rates on banks’ intermediation capacity only took place after a protracted time period. Our study highlights the role of the initial conditions, i.e., whether deposit rates were well above the ZLB or close to it in the different economies of the euro area when negative interest rates were introduced, as well as the importance of adequate bank capitalization. However, we find no evidence of funding constraints on firms due to negative rates at the end of 2019.

Keywords: negative interest rates, negative for long, zero lower bound, lending policies, bank capital ratio, risk taking.

JEL Classification: G21, E52, E58

Suggested Citation

Arce, Oscar and Garcia-Posada, Miguel and Mayordomo, Sergio and Ongena, Steven R. G., Adapting lending policies in a “negative-for-long” scenario (February 9, 2021). Swiss Finance Institute Research Paper No. 21-75, Available at SSRN: https://ssrn.com/abstract=3161924 or http://dx.doi.org/10.2139/ssrn.3161924

Oscar Arce

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Miguel Garcia-Posada

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Sergio Mayordomo (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

NTNU Business School ( email )

Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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