Bank Intermediation Margin in Time of Negative Interest Rate Policy

Abstract

Following the 2008 Global Financial Crisis, the central banks from many advanced economies resorted to unconventional monetary policies including, the adoption of a negative interest rate policy, aimed at spurring economic recovery and growth. The effectiveness of a negative interest rate policy remains an ongoing debate and largely limited to theoretical assertions. Using a dataset that comprises 9638 banks from 59 countries over the period 2009–2018, and a Difference-in-Differences estimator, this paper examines whether the adoption of a negative interest rate policy has any effect on bank intermediation margins. We find that bank margins have contracted in countries where negative rates have been implemented. Our results highlight that this margin compression is related to a downwardly rigid customer deposit rate. Moreover, we show that the effects of NIRP on bank intermediation margins were stronger for smaller, less capitalized, deposit-dependent banks. Finally, our findings indicate that banks reliant on retail deposits increased lending in response to NIRP.

Keywords: Negative Interest Rates, Bank Margins, Interest Expenses, Interest Income, Difference-in-Differences Estimation

JEL Classification: E43, E51, E52, F34, G21