Interest rate pass-through and bank risk-taking under negative-rate policies with tiered remuneration of Central Bank Reserves

Christoph Basten and Mike Mariathasan

No 20-98, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We identify the effects of negative interest rate policies on bank behavior using difference-in differences identification and data on all Swiss banks. First, we find that going negative can interrupt not only the pass-through from policy to deposit rates, but also that to mortgage rates. Second, banks’ ability to offset negative deposit margins with increased mortgage margins is shown to depend on market power. Third, imposing negative rates on all central bank reserves causes banks to replace one sixth with riskier assets, and cut another sixth without replacement, shortening their balance sheets. Together with increased mortgage margins and fee income, the asset replacement preserves profits, but increases financial stability risks. Fourth, mortgage margin increases, balance sheet contractions and risk increases differ from positive rate policy. Fifth, the interruption in pass-through and the risks to financial stability can be reduced by up to 90% through tiered remuneration, charging marginal reserves only.

Keywords: negative interest rate policy; tiered remuneration; interest rate pass-through; credit risk; interest rate risk (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 G20 G21 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2020-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Interest rate pass-through and bank risk-taking under negative-rate policies with tiered remuneration of central bank reserves (2023)
Working Paper: How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2098

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