Life Below Zero: Bank Lending Under Negative Policy Rates
68 Pages Posted: 24 Sep 2018
Date Written: September 2018
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 could pose a risk to financial stability, if lending is done by high-deposit banks.
Keywords: bank balance-sheet channel, bank risk-taking channel, deposits, Negative Interest Rates, zero lower bound
JEL Classification: E44, E52, E58, G20, G21
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