Implications of Negative Interest Rates for the Net Interest Margin and Lending of Euro Area Banks

37 Pages Posted: 15 Apr 2020

Multiple version iconThere are 2 versions of this paper

Date Written: March 18, 2020

Abstract

This paper explores the impact of low (but) positive and negative market interest rates on euro area banks' net interest margin (NIM) and its components, retail lending and retail deposit rates. Using two proprietary bank-level data sets, I find a positive impact of the level of the short-term rate on the NIM, which increases substantially at negative market rates. As low profitability could hamper the ability of banks to expand lending, I also investigate the impact of the NIM on new lending to the non-financial private sector. In general, the NIM is positively related to lending: When lending is less profitable, banks cut lending. However, at negative rates this effect vanishes. This finding suggests that banks adjusted their business practices when servicing new loans, thereby contributing to higher new lending in the euro area since 2014.

Keywords: net interest margin, monetary policy, negative interest rates, bank pro tability, lending

JEL Classification: G21, E43, E52

Suggested Citation

Klein, Melanie, Implications of Negative Interest Rates for the Net Interest Margin and Lending of Euro Area Banks (March 18, 2020). BIS Working Paper No. 848, Available at SSRN: https://ssrn.com/abstract=3571400

Melanie Klein (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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