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Life below zero: Bank lending under negative policy rates

Florian Heider, Farzad Saidi and Glenn Schepens

No 13191, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We show that negative policy rates affect the supply of bank credit in a novel way. Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding. Our results suggest that negative rates are less accommodative, and could pose a risk to financial stability, if lending is done by high-deposit banks.

Keywords: bank balance-sheet channel; bank risk-taking channel; deposits; Negative Interest Rates; zero lower bound (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G20 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-eec and nep-mac
Date: 2018-09
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