Bank Lending Margins in a Negative Interest Rate Environment
28 Pages Posted: 16 Dec 2019 Last revised: 22 Dec 2020
Date Written: December 2020
Following the 2008 Global Financial Crisis, the central banks of 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 this policy remains an ongoing debate and largely limited to theoretical assertions. Using a dataset of 9,638 banks from 41 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 lending margins. We find that bank margins have contracted in countries where negative rates have been implemented. Our results suggest that, in a negative interest rate environment, the rate on loans declines faster than the rate on retail deposits. Moreover, we show that the effects of NIRP on bank lending 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, Loan Rate, Deposit Rate, Difference-in-Differences Estimation
JEL Classification: E43, E51, E52, F34, G21
Suggested Citation: Suggested Citation