Bank business models, negative policy rates, and prudential regulation

Roberto Savona ()
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Roberto Savona: University of Brescia

Annals of Finance, 2022, vol. 18, issue 3, No 3, 355-392

Abstract: Abstract Using data from Italian banks over the period 2011–2017, we study how negative interest rate policy and prudential regulation impact on bank business models. We report four key findings. First, banks shifted into retail- and market-oriented business models. Second, high- and low-deposit banks reduced loans and increased security/liquid assets; only market-oriented banks expanded lending. Third, interest rate income compression induced by negative rates has been substantial for the Italian banking system as a whole, although retail banks seem to have suffered less. Fourth, non-interest incomes played a compensatory effect. The portfolio reshuffling, as we observed for wholesale and retail banks (less lending and more securities/liquid assets), is related to the goal of reducing risk exposures and, in turn, the connected capital absorption required by prudential regulation.

Keywords: Negative interest rate policy; Bank lending; Portfolio rebalancing (search for similar items in EconPapers)
JEL-codes: C33 E52 G11 G21 L51 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10436-021-00397-1

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