Negative Interest Rates, Excess Liquidity and Retail Deposits: Banks’ Reaction to Unconventional Monetary Policy in the Euro Area

Demiralp, Selva; Eisenschmidt, Jens; Vlassopoulos, Thomas

doi:10.2139/ssrn.3391745

Cited by 17 publications

(20 citation statements)

References 29 publications

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“…All four provide support for the role of reserves in monetary transmission when interest rates are negative, and for the opportunity cost of lending channel. Demiralp et al (2019) find positive lending effects for banks with greater excess liquidity in the Euro Area, and greater risk-taking in loans. The authors interpretation is that once banks' profitability declines, excess liquidity provides banks an opportunity to shift to higher-yielding lending opportunities.…”

Section: Effects On Bank Lendingmentioning

confidence: 80%

“…These actions (charging higher fees, closing branches, cutting costs) could help sustain bank profitability in a negative-rate environment. This channel has not been featured in theoretical negative-rates papers, but it has been prominent in empirical papers like Basten and Mariathasan (2018), Demiralp et al (2019), Lopez et al (2020), and Hong and Kandrac (2018), among others.…”

Section: Effects On Bank Profitabilitymentioning

confidence: 99%

“…Only the first of these options implies higher overall lending. The reaching for yield channel has been emphasized in empirical papers like Demiralp et al (2019) and Hong and Kandrac (2018).…”

Section: Effects On Bank Lending Mediated By Profitabilitymentioning

confidence: 99%

“…Several cross-sectional papers do not study profitability but rather focus on outcomes such as bank lending and bank risk, we discuss these in the following section. They also vary in terms of the exposure variable used to compare banks, for example using bank business model(Nucera et al, 2017), excess liquidity(Demiralp et al, 2019), high-frequency stock-price responses to monetary policy announcements(Hong and Kandrac, 2018), or self-assessments(Arce et al, 2018). 12 This is statistically significant in specifications with bank and year fixed effects, but not in specifications without.13 Loan loss provisions -funds that banks put aside to protect against borrower default -are also potentially important for bank profitability.…”

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confidence: 99%

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Making Sense of Negative Nominal Interest Rates

Balloch¹,

Koby²,

Ulate³

2022

ERWP

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Several advanced economies implemented negative nominal interest rates in the middle of the last decade, seeking to provide further monetary accommodation once cuts in positive territory had been exhausted. Negative rates affect banks in novel ways, mostly because during times of negative policy rates the interest rate that banks pay households on their deposits usually remains close to zero. In this review, we analyze the large literature that studies the impact of negative nominal interest rates, proceeding in four steps. First, we explain the theoretical channels through which negative rates affect banks. Second, we discuss the empirical findings about bank outcomes under negative rates. Third, we describe the aggregate transmission channels that influence the macroeconomic implications of a policy rate cut in negative territory. Finally, we compare the general-equilibrium models that have been used to quantify the effectiveness of negative rates and highlight why they have obtained mixed results. We conclude that, if properly implemented, negative rates are a valuable tool that central banks should not discard outright. However, negative rates can have quantifiable costs for the financial sector, and their effectiveness is likely to decline if implemented for long periods.

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Section: Effects On Bank Lendingmentioning

confidence: 80%

Section: Effects On Bank Profitabilitymentioning

confidence: 99%

Section: Effects On Bank Lending Mediated By Profitabilitymentioning

confidence: 99%

mentioning

confidence: 99%

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Making Sense of Negative Nominal Interest Rates

Balloch¹,

Koby²,

Ulate³

2022

ERWP

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“…After the 2008 financial crisis, the European sovereign debt crisis and the COVID-19 recession, it appears that such instruments, designed to be unconventional and methods of last resort, are starting to become conventional ones instead (see ; Borio and Zabai 2016 ; Quint and Rabanal 2017 ). Yet, after more than a decade of use, their effects are far from been fully understood and economic research is in continuous update in this respect (see ; Kuttner 2018 ; Rossi 2021 ; De Santis and Zaghini 2021 ; Demiralp et al 2021 ). What we know is that unconventional monetary policies allowed to stabilize and lower market yields (Krishnamurthy and Vissing-Jorgensen 2011 ; Duca 2013 ), to reignite a freezing credit market (Rodnyansky and Darmouni 2017 ), and to dampen the downward phase of the credit cycle (Bhattarai and Neely 2016 ).…”

Section: Introductionmentioning

confidence: 99%

Unconventional monetary policies in an agent-based model with mark-to-market standards

Guerini

Lamperti

Napoletano

et al. 2022

Rev Evol Polit Econ

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We employ an agent-based model to shed light on the macroeconomic effects of accounting principles, unconventional monetary policies, and of their possible interactions. If mark-to-market accounting standards may entail positive feedbacks which amplify economic or financial shocks, unconventional policies may introduce negative feedbacks that might dampen instabilities in financial and real markets. For these reasons, we jointly study these two sets of policies by employing a modified version of the Schumpeter meeting Keynes (K+S) macroeconomic agent-based model. Our results confirm that, due to its pro-cyclical nature, the mark-to-market accounting standard amplifies credit cycles, generating more instability with respect to a simulated economy wherein the historical accounting principle is employed. In contrast, unconventional monetary policy is counter-cyclical and it improves macroeconomic indicators. Finally, we study a scenario wherein mark-to-market accounting and unconventional monetary policy interact. We find that unconventional monetary policy can counterbalance the negative effects brought about by the application of mark-to-market accounting. Our results suggest that unconventional monetary policy instruments should not be considered as temporary interventions to be employed only during crisis periods. They should be part of the toolbox of central banks also in normal times.

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Bank lending margins in a negative interest rate environment

Boungou

Mawusi

2021

Int. J Fin Econ

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Following the 2008 Global Financial Crisis, the central banks of many advanced economies resorted to unconventional monetary policies including, the adoption of a negative interest rate policy, aimed at spurring economic recovery and growth. The effectiveness of this policy remains an ongoing debate and largely limited to theoretical assertions. Using a dataset of 9,638 banks from 41 countries over the period 2009-2018, and a Difference-in-Differences estimator, this paper examines whether the adoption of a negative interest rate policy has any effect on bank lending margins. We find that bank margins have contracted in countries where negative rates have been implemented. Our results suggest that, in a negative interest rate environment, the rate on loans declines faster than the rate on retail deposits. Moreover, we show that the effects of negative interest rate policy (NIRP) on bank lending margins were stronger for smaller, less capitalized, deposit-dependent banks. Finally, our findings indicate that banks reliant on retail deposits increased lending in response to NIRP.

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Negative Interest Rates, Excess Liquidity and Retail Deposits: Banks’ Reaction to Unconventional Monetary Policy in the Euro Area

Cited by 17 publications

References 29 publications

Making Sense of Negative Nominal Interest Rates

Making Sense of Negative Nominal Interest Rates

Unconventional monetary policies in an agent-based model with mark-to-market standards

Bank lending margins in a negative interest rate environment

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