Monetary Policy and Bank Equity Values in a Time of Low and Negative Interest Rates

47 Pages Posted: 22 Oct 2019

See all articles by Miguel Ampudia

Miguel Ampudia

European Central Bank (ECB) - Directorate General Research

Skander Van den Heuvel

Board of Governors of the Federal Reserve System

Date Written: May 2019

Abstract

Does banks' exposure to interest rate risk change when interest rates are very low or even negative? Using a high-frequency event study methodology and intraday data, we find that the effect of surprise interest rate cuts announced by the ECB on European bank equity values - an effect that is normally positive - has become negative since interest rates in the euro area reached zero and below. Since then, a further unexpected cut of 25 basis points in the short-term policy rate lowered banks' stock prices by about 2% on average, compared to a 1% increase in normal times. In the cross section, this 'reversal' was far more pronounced for banks with a more traditional, deposit-intensive funding mix. We argue that the reversal as well as its cross-sectional pattern can be explained by the zero lower bound on interest rates on retail deposits.

Keywords: Bank profitability, Interest rate risk, Monetary policy, Negative interest rates, ECB

JEL Classification: G21, E52, E58

Suggested Citation

Ampudia, Miguel and Van den Heuvel, Skander, Monetary Policy and Bank Equity Values in a Time of Low and Negative Interest Rates (May 2019). FEDS Working Paper No. 2019-064, Available at SSRN: https://ssrn.com/abstract=3473048 or http://dx.doi.org/10.17016/FEDS.2019.064

Miguel Ampudia (Contact Author)

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Skander Van den Heuvel

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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