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Do Negative Interest Rates Affect Bank Risk-Taking?

Alessio Reghezza, Jonathan Williams (), Alessio Bongiovanni () and Riccardo Santamaria ()
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Jonathan Williams: Bangor University
Alessio Bongiovanni: University of Turin
Riccardo Santamaria: Sapienza – University of Rome

No 19012, Working Papers from Bangor Business School, Prifysgol Bangor University (Cymru / Wales)

Abstract: We offer early evidence on how negative interest rate policy affects bank risk-taking. We identify a dichotomy between monetary policy and prudential regulation. Our primary result suggests NIRP produced an unintended outcome, which we measure as a 10 per cent reduction in banks’ holdings of risky assets. It infers that banks deleverage their balance sheets and invest in safer, liquid assets to meet new and binding capital and liquidity requirements. We find risk-taking behaviour is sensitive to capitalisation and banks with stronger capital ratios take more risks. Similarly, tighter prudential requirements could inadvertently retard economic growth should poorly capitalised banks reduce investment in riskier assets in favour of zero risk-weighted assets, such as, sovereign bonds to comply with risk-based capital requirements. Risk-taking is greater in less competitive markets because stronger market power insulates net interest margins and profitability. We obtain our results from a sample of 2,371 banks from 33 OECD countries between 2012 and 2016, and a difference-in-differences framework.

Keywords: NIRP; Bank risk-taking; Monetary Policy; Difference-in-Differences; Propensity-Score-Matching. (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 G21 F34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
Date: 2019-05
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