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Life below zero: bank lending under negative policy rates

Florian Heider, Farzad Saidi and Glenn Schepens

No 2173, Working Paper Series from European Central Bank

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. JEL Classification: E44, E52, E58, G20, G21

Keywords: bank balance-sheet channel; bank risk-taking channel; deposits; negative interest rates; zero lower bound (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mac
Date: 2018-08
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