Why Have Negative Nominal Interest Rates Had Such a Small Effect on Bank Performance? Cross Country Evidence

37 Pages Posted: 17 Sep 2018

See all articles by Jose A. Lopez

Jose A. Lopez

Federal Reserve Bank of San Francisco

Andrew Kenan Rose

University of California - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Mark M. Spiegel

Federal Reserve Bank of San Francisco - Economic Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: September 2018

Abstract

We examine the effect of negative nominal interest rates on bank profitability and behavior using a cross-country panel of over 5,100 banks in 27 countries. Our data set includes annual observations for Japanese and European banks between 2010 and 2016, which covers all advanced economies that have experienced negative nominal rates, including currency union members as well as both fixed and floating exchange rates countries. When we compare negative nominal interest rates with low positive rates, banks experience losses in interest income that are almost exactly offset by savings on deposit expenses and gains in non-interest income, including capital gains on securities and fees. We find heterogeneous effects of negative rates: banks from regimes with floating exchange rates, small banks, and banks with low deposit ratios drive most of our results. Low-deposit banks have enjoyed particularly striking gains in non-interest income, likely from capital gains on securities. There have only been modest differences between high and low deposit-ratio banks’ changes in interest expenses; high deposit banks do not seem disproportionately vulnerable to negative rates. Banks also responded to negative rates by increasing lending activity, and raising the share of deposit funding. Overall, our results indicate surprisingly benign implications of negative rates for commercial banks thus far.

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Suggested Citation

Lopez, Jose Antonio and Rose, Andrew Kenan and Spiegel, Mark M., Why Have Negative Nominal Interest Rates Had Such a Small Effect on Bank Performance? Cross Country Evidence (September 2018). NBER Working Paper No. w25004. Available at SSRN: https://ssrn.com/abstract=3246827

Jose Antonio Lopez (Contact Author)

Federal Reserve Bank of San Francisco ( email )

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Andrew Kenan Rose

University of California - Haas School of Business ( email )

Berkeley, CA 94720
United States
510-642-6609 (Phone)
510-642-4700 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/arose

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Mark M. Spiegel

Federal Reserve Bank of San Francisco - Economic Research Department ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3184 (Phone)
415-974-2168 (Fax)

HOME PAGE: http://www.frbsf.org/economics/economists/mspiegel.html

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