Intermediation Below Zero: Effects of Negative Interest Rates on Banks' Performance and Lending

61 Pages Posted: 19 Dec 2019

See all articles by Santiago Carbo-Valverde

Santiago Carbo-Valverde

Bangor Business School; Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF)

Pedro Cuadros-Solas

Colegio Universitario de Estudios Financieros (CUNEF)

Francisco Rodriguez-Fernandez

University of Granada - Department of Economic Theory and History

Date Written: November 30, 2019

Abstract

Reducing interest rates below zero may be justified on theoretical grounds while, in practice, it is shown to create a number of distortions and malfunctions in several dimensions of banking and financial markets, which in turn may affect the whole economy. This paper surveys international experience of negative interest rates and the existing theoretical and empirical research of the impact on banks. It also investigates the impact of negative interest rates on the European banking sector using a dataset of 3,155 banks from 36 European countries over 2011–2018. Using a difference-in-differences methodology, we show that banks in negative interest-rate environments experienced a 18.4% decrease in their net interest margins compared to other banks operating in European countries that did not adopt negative interest rates. We also show banks taking more customer deposits are more affected.

Keywords: Negative Interest Rates, Intermediation, Lending, Central Banks, Banks

JEL Classification: E43, E44, E52, G21, F34

Suggested Citation

Carbo-Valverde, Santiago and Cuadros-Solas, Pedro and Rodriguez-Fernandez, Francisco, Intermediation Below Zero: Effects of Negative Interest Rates on Banks' Performance and Lending (November 30, 2019). Available at SSRN: https://ssrn.com/abstract=3498277 or http://dx.doi.org/10.2139/ssrn.3498277

Santiago Carbo-Valverde (Contact Author)

Bangor Business School ( email )

Bangor Business School
College Road
Gwynedd LL57 2DG, Wales LL57 2DG
United Kingdom

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF) ( email )

Serrano Anguita 9
Madrid, Madrid 28004
Spain

Pedro Cuadros-Solas

Colegio Universitario de Estudios Financieros (CUNEF)

C/ Leonardo Prieto Castro, 2, Ciudad Universitaria
Madrid, Madrid 28040
Spain

Francisco Rodriguez-Fernandez

University of Granada - Department of Economic Theory and History ( email )

Granada
Spain

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