The channels of banks’ response to negative interest rates

Abstract

Faced with a potential zero lower bound on deposit interest rates, how do banks pass on
the fall in net interest income due to negative interest rates? This paper aims to investigate
the different channels of banks’ responses to negative interest rates using a detailed
breakdown of the profit and loss account of 3637 banks in 59 countries from 2011 to 2018.
We find that the decrease in interest income due to negative interest rates has been
mitigated by an increase in non-interest income, but only partially. We find that banks
responded to that shock by reducing the interest paid on non-customer deposit liabilities
and their personnel expenses. We also show that banks’ responses are not instantaneous
and that they adjust their response as negative interest rates persist over time such that
how long negative interest rates are implemented matters. Finally, our results suggest that
large banks with higher deposits and higher leverage ratios were the most affected by the
implementation of negative interest rates.

Keywords: Bank profitability, Interest flows, Non-interest flows, Deposits, Leverage

JEL Classification: C2, E5, G2