The Upside Down: Banks, Deposits and Negative Rates
71 Pages Posted: 3 May 2019 Last revised: 1 Feb 2021
Date Written: 20 1, 2021
Using confidential bank-firm level data for France, we show that the introduction of negative rates by the European Central Bank is associated with an expansion in lending by banks with greater reliance on deposits, especially by those with lower capital and larger shares of liquid and households deposits. Consistent with portfolio rebalancing, negative rates appear to also elicit reallocation toward riskier and long-term assets, as banks shrink their share of interbank liquidity and grow that of corporate loans and debt securities. Finally, we document that this behavior generalizes to other countries in the Euro Area. Our results suggest that negative rates encourage banks most reliant on deposits to engage in riskier activities to shield profitability, and confirm that deposits play a key role in the transmission of monetary policy rates below the zero lower bound.
Keywords: Monetary Policy, Negative Rates, Deposit Channel, Banks, Risk Taking, Credit
JEL Classification: E43, E44, E52, E58, G21
Suggested Citation: Suggested Citation