Do negative interest rates affect bank risk-taking?

Alessio Bongiovanni, Alessio Reghezza (), Riccardo Santamaria and Jonathan Williams

Journal of Empirical Finance, 2021, vol. 63, issue C, 350-364

Abstract: We offer early evidence on the impact of negative interest rate policy (NIRP) on banks’ risk-taking. Our primary result shows banks in NIRP-adopter countries reduce holdings of risky assets by around 10 percentage points following implementation of NIRP in comparison to banks in non-adopter countries. We augment this result by identifying NIRP’s impact on other aspects of banks’ risk-taking behaviour; NIRP is associated with reductions in banks’ loan growth and average loan price (by 3.7 percentage points and 59 basis points) and a rebalancing of asset portfolios towards safer assets. Secondly, we find the NIRP-effect is heterogeneous; post-NIRP risk-taking increases at strongly capitalised banks and at banks operating in less competitive markets that exploit market power to insulate net interest margins and profitability. Our robust empirical evidence supports the “de-leverage” hypothesis which suggests that banks acquire safer, liquid assets to bolster their capital positions rather than searching for value by acquiring riskier assets. We base our evidence on a sample of 2,584 banks from 33 OECD countries across 2012 to 2016, and from models that employ a difference-in-differences framework.

Keywords: NIRP; Bank risk-taking; Monetary policy; Difference-in-differences (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 F34 G21 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Do Negative Interest Rates Affect Bank Risk-Taking? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:63:y:2021:i:c:p:350-364

DOI: 10.1016/j.jempfin.2021.07.008

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