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How Would US Banks Fare in a Negative Interest Rate Environment?

David Arseneau

No 2017-030r1, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The effectiveness of negative interest rates as a monetary policy tool depends importantly on the response of the banking sector. This paper offers unique new insights for U.S. banks by using supervisory data to examine bank-level expectations regarding the impact of negative rates on profitability through net interest margins. The main results show that the largest U.S. banks differ significantly in how they respond to negative interest rates. The most significant channel of adverse exposure comes from the pass-through of the negative policy rate to interest rates on short-term liquid assets held on the balance sheet. At the same time, on the liability side, banks that rely more heavily on short-term wholesale funding, including financing through the repo market, may benefit through a reduction in funding costs. In the aggregate, these effects likely wash out as liquidity provision is sufficiently well diversified across the banking sector as a whole.

Keywords: Banking conditions; net interest margins; Unconventional monetary policy (search for similar items in EconPapers)
JEL-codes: E43 E44 G21 (search for similar items in EconPapers)
Pages: 33
Date: 2017-03, Revised 2020-07-31
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-30

DOI: 10.17016/FEDS.2017.030r1

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