Interest Rate Pass-Through and Bank Risk-Taking under Negative-Rate Policies with Tiered Remuneration of Central Bank Reserves

Negative Interest Rates

“…According to some studies, banks with more liquid assets and greater access to wholesale funding are able to increase lending more after NIRP. Studies that use different cross-sectional characteristics to measure the exposure to NIRP find a stronger increase in lending by banks with a larger share of liquid assets (Bottero and others 2019) and more excess reserves with the central bank (Basten and Mariathasan 2019). Moreover, banks with a lower share 12 Several studies have used bank heterogeneity to better identify the effects of NIRP on banks' net interest income and profitability.…”

Bank Risk-Taking and Impaired Monetary Policy Transmission

“…However, these models abstract from the characteristics of the current low interest en-vironment. Therefore, they cannot explain empirical observations that occur specifically at low levels of policy rate, e.g., a positive relationship between bank profits and policy rates (Ampudia & Van den Heuvel, 2019;Wang et al, 2020), or a negative relationship between mortgage rates and policy rates (Basten & Mariathasan, 2020;Miller & Wanengkirtyo, 2020). These empirical relations are implied by models that study the impaired bank lending channel and emphasize the importance of the lower bound on deposit rates and banks' excess liquidity holdings (e.g., Brunnermeier & Koby (2017); Eggertsson et al (2019); Ulate (2021)).…”

“…These empirical relations are implied by models that study the impaired bank lending channel and emphasize the importance of the lower bound on deposit rates and banks' excess liquidity holdings (e.g., Brunnermeier & Koby (2017); Eggertsson et al (2019); Ulate (2021)). However, these models abstract from banks' risk and therefore can explain neither why banks may increase their risk-taking when policy rates become negative (Basten & Mariathasan, 2020;Heider et al, 2019;Bittner et al, 2021), nor why a weaker pass-through to loan rates can be observed specifically for riskier banks (Arce et al, 2021).…”

Bank Risk-Taking and Impaired Monetarypolicy Transmission

“…However, these models abstract from the characteristics of the current low interest en-vironment. Therefore, they cannot explain empirical observations that occur specifically at low levels of policy rate, e.g., a positive relationship between bank profits and policy rates (Ampudia & Van den Heuvel, 2019;Wang et al, 2020), or a negative relationship between mortgage rates and policy rates (Basten & Mariathasan, 2020;Miller & Wanengkirtyo, 2020). These empirical relations are implied by models that study the impaired bank lending channel and emphasize the importance of the lower bound on deposit rates and banks' excess liquidity holdings (e.g., Brunnermeier & Koby (2017); Eggertsson et al (2019); Ulate (2021)).…”

“…These empirical relations are implied by models that study the impaired bank lending channel and emphasize the importance of the lower bound on deposit rates and banks' excess liquidity holdings (e.g., Brunnermeier & Koby (2017); Eggertsson et al (2019); Ulate (2021)). However, these models abstract from banks' risk and therefore can explain neither why banks may increase their risk-taking when policy rates become negative (Basten & Mariathasan, 2020;Heider et al, 2019;Bittner et al, 2021), nor why a weaker pass-through to loan rates can be observed specifically for riskier banks (Arce et al, 2021).…”