Negative Interest Rates, Excess Liquidity and Retail Deposits: Banks’ Reaction to Unconventional Monetary Policy in the Euro Area

63 Pages Posted: 21 May 2019

See all articles by Selva Demiralp

Selva Demiralp

Koc University - Department of Economics

Jens Eisenschmidt

European Central Bank (ECB)

Thomas Vlassopoulos

European Central Bank (ECB)

Date Written: May 20, 2019

Abstract

Negative monetary policy rates are associated with a particular friction because the remuneration of retail deposits tends to be floored at zero. We investigate whether this friction affects banks’ reactions when the policy rate is lowered to negative levels, compared to a standard rate cut in the euro area. We exploit the cross-sectional variation in banks’ funding structures jointly with that in their excess liquidity holdings. We find evidence that banks highly exposed to the policy tend to grant more loans. This confirms studies that point to higher risk taking by banks as a reaction to negative rates. It, however, contrasts some earlier research associating negative rates with a contraction in loans. We illustrate that the difference is likely driven by the broader coverage of our loan data, longer time span of our sample and, importantly, the explicit consideration of the role of excess liquidity in our analysis.

Keywords: negative rates, bank balance sheets, monetary transmission mechanism

JEL Classification: E53, E52, G11, G21

Suggested Citation

Demiralp, Selva and Eisenschmidt, Jens and Vlassopoulos, Thomas, Negative Interest Rates, Excess Liquidity and Retail Deposits: Banks’ Reaction to Unconventional Monetary Policy in the Euro Area (May 20, 2019). ECB Working Paper No. 2283 (2019); ISBN 978-92-899-3545-6 . Available at SSRN: https://ssrn.com/abstract=3391745

Selva Demiralp

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910 Istanbul
Turkey
+212 338 1842 (Phone)

Jens Eisenschmidt (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Thomas Vlassopoulos

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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