Negative Interest Rates as Game Changer: Harming Banks and Helping Alternative Lenders
46 Pages Posted: 14 Aug 2020 Last revised: 14 Jun 2022
Date Written: June 13, 2021
Core bank deposits are a cheap funding source. Non-banks must pay more to refinance loans. However, by lending under the risk of negative rates, banks must consider the withdrawal right of paper currency before creating new deposits. Unlike banks, alternative lenders do not create money by lending, are funded by selling bonds and not by issuing deposits. Under differentiated Bertrand competition, due to lower marginal funding costs, I show that non-banks can offer more competitive loan rates at and below the zero bound. Profits and market shares shift from depository institutions to non-banks. The empirical analysis confirms my model's forecasts.
Keywords: Bank profitability, Liquidity trap, Nash equilibrium, Bank lending channel, Zero lower bound, Option pricing, COVID-19
JEL Classification: E44, E52, E58, G13, G21, G23, L13, L16
Suggested Citation: Suggested Citation