Adapting Lending Policies When Negative Interest Rates Hit Banks’ Profits

49 Pages Posted: 8 Oct 2018

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; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: September 26, 2018

Abstract

What is the impact of negative interest rates on bank lending and risk-taking? To answer this question we study the changes in lending policies using both the Euro area Bank Lending Survey and the Spanish Credit Register. Banks whose net interest income is adversely affected by negative rates are concurrently lowly capitalized, take less risk and adjust loan terms and conditions to shore up their risk weighted assets and capital ratios. These banks also increase non-interest charges more. But, importantly, we find no differences in banks’ credit supply or standard setting, neither in the Euro area nor in Spain. These findings suggest that negative rates do not necessarily contract the supply of credit and that the so-called “reversal rate” may not have been reached yet.

Keywords: negative interest rates, risk taking, lending policies

JEL Classification: G21, E52, E58

Suggested Citation

Arce, Oscar and Garcia-Posada, Miguel and Mayordomo, Sergio and Ongena, Steven R. G., Adapting Lending Policies When Negative Interest Rates Hit Banks’ Profits (September 26, 2018). Banco de Espana Working Paper No. 1832. Available at SSRN: https://ssrn.com/abstract=3255441 or http://dx.doi.org/10.2139/ssrn.3255441

Oscar Arce (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Miguel Garcia-Posada

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Sergio Mayordomo

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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