Bank interest rate margins in a negative interest rate environment

57 Pages Posted: 22 Jul 2021

See all articles by Jorien Freriks

Jorien Freriks

De Nederlandsche Bank

Jan Kakes

De Nederlandsche Bank - Monetary and Economic Policy Department

Date Written: July 20, 2021

Abstract


This paper studies the impact of the negative interest rate policy (NIRP) on euro area banks’ interest rate margins, using bank-individual data for the 2007-2019 period. An important extension to other studies is our breakdown of banks’ interest rate margin into a funding and lending component. Because of banks’ reluctance to reduce the interest rate on household deposits below zero, the funding margin of banks more reliant on deposit funding has declined compared to that of other banks. Our evidence shows that these banks have been unwilling or unable to compensate this by boosting their lending margins. Therefore, negative rates have significantly reduced the overall net interest margin of deposit-dependent banks compared to other banks.

Keywords: monetary policy, negative interest rates, banks, interest margin

JEL Classification: E43, E52, G21

Suggested Citation

Freriks, Jorien and Kakes, Jan, Bank interest rate margins in a negative interest rate environment (July 20, 2021). De Nederlandsche Bank Working Paper No. 721, Available at SSRN: https://ssrn.com/abstract=3890014 or http://dx.doi.org/10.2139/ssrn.3890014

Jorien Freriks (Contact Author)

De Nederlandsche Bank ( email )

Netherlands

Jan Kakes

De Nederlandsche Bank - Monetary and Economic Policy Department ( email )

Westeinde 1
1017 ZN Amsterdam
Netherlands

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