European Bank Margins at the Zero Lower Bound

47 Pages Posted: 18 Nov 2021 Last revised: 11 Feb 2022

See all articles by Thomas Present

Thomas Present

Ghent University - Department of Economics

Mathieu Simoens

Ghent University - Department of Economics

Rudi Vander Vennet

Ghent University - Department of Financial Economics

Date Written: February 4, 2022

Abstract

Post-2014, the zero lower bound on household deposits has intensified the downward pressure of the ECB's accommodative monetary policy on banks' net interest margins. Using a shadow rate to capture the stance of (unconventional) monetary policy, we construct counterfactual deposit rates, representing the path that deposit rates in 10 euro area countries would have followed in absence of the zero lower bound. Based on this counterfactual, we investigate whether banks attempt to compensate foregone deposit margins by increasing their lending margins. Our results show a substantial degree of margin compensation (around 44%), in line with the existence of a reversal rate. Moreover, banks which are highly dependent on net interest income increase their lending margins more, while higher shares of fee and commission income soften the compensation effect. Our estimations reveal important heterogeneity across euro area countries, with the end-2019 impact on lending margins ranging from negligible to more than 100 bps. These findings have implications for bank profitability, but also for the transmission of monetary policy to bank lending.

Keywords: euro area banks, zero lower bound, lending rate, deposit rate, reversal rate

JEL Classification: G21, G28, G01

Suggested Citation

Present, Thomas and Simoens, Mathieu and Vander Vennet, Rudi, European Bank Margins at the Zero Lower Bound (February 4, 2022). Available at SSRN: https://ssrn.com/abstract=3964869 or http://dx.doi.org/10.2139/ssrn.3964869

Thomas Present

Ghent University - Department of Economics ( email )

Belgium

Mathieu Simoens (Contact Author)

Ghent University - Department of Economics ( email )

Belgium

Rudi Vander Vennet

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium
+32 9 264 35 13 (Phone)
+32 9 264 35 92 (Fax)

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