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How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold

Christoph Basten and Mike Mariathasan ()

No 6901, CESifo Working Paper Series from CESifo Group Munich

Abstract: We analyze the effect of negative monetary policy rates on banks, using detailed supervisory information from Switzerland. For identification, we compare changes in the behavior of banks that had different fractions of their central bank reserves exempt from negative rates. More affected banks reduce costly reserves and bond financing while maintaining non-negative deposit rates and larger deposit ratios. Higher fee and interest income successfully compensates for squeezed liability margins, but credit and interest rate risk increase. Portfolio rebalancing implies relatively more lending, also compared to an earlier rate cut within positive territory, and risk-taking reduces regulatory capital cushions and liquidity.

Keywords: monetary policy transmission; negative interest rates; bank profitability; risk-taking; bank lending; Basel III (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 G20 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-eec, nep-mac and nep-mon
Date: 2018
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