How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold

62 Pages Posted: 19 Apr 2018

See all articles by Christoph Basten

Christoph Basten

University of Zurich

Mike Mariathasan

KU Leuven- Faculty of Economics & Business

Date Written: February 21, 2018

Abstract

We analyze the effect of negative monetary policy rates on banks, using detailed supervisory information from Switzerland. For identification, we compare changes in the behavior of banks that had different fractions of their central bank reserves exempt from negative rates. More affected banks reduce costly reserves and bond financing while maintaining non-negative deposit rates and larger deposit ratios. Higher fee and interest income successfully compensates for squeezed liability margins, but credit and interest rate risk increase. Portfolio rebalancing implies relatively more lending, also compared to an earlier rate cut within positive territory, and risk-taking reduces regulatory capital cushions and liquidity.

Keywords: monetary policy transmission, negative interest rates, bank profitability, risk-taking, bank lending, Basel III

JEL Classification: E430, E440, E520, E580, G200, G210

Suggested Citation

Basten, Christoph and Mariathasan, Mike, How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold (February 21, 2018). CESifo Working Paper Series No. 6901. Available at SSRN: https://ssrn.com/abstract=3164780

Christoph Basten (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Mike Mariathasan

KU Leuven- Faculty of Economics & Business ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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