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Negative interest rates, excess liquidity and retail deposits: banks’ reaction to unconventional monetary policy in the euro area

Selva Demiralp, Jens Eisenschmidt () and Thomas Vlassopoulos

No 2283, Working Paper Series from European Central Bank

Abstract: Negative monetary policy rates are associated with a particular friction because the remuneration of retail deposits tends to be floored at zero. We investigate whether this friction affects banks’ reactions when the policy rate is lowered to negative levels, compared to a standard rate cut in the euro area. We exploit the cross-sectional variation in banks’ funding structures jointly with that in their excess liquidity holdings. We find evidence that banks highly exposed to the policy tend to grant more loans. This confirms studies that point to higher risk taking by banks as a reaction to negative rates. It, however, contrasts some earlier research associating negative rates with a contraction in loans. We illustrate that the difference is likely driven by the broader coverage of our loan data, longer time span of our sample and, importantly, the explicit consideration of the role of excess liquidity in our analysis. JEL Classification: E43, E52, G11, G21

Keywords: bank balance sheets; monetary transmission mechanism; negative rates (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
Date: 2019-05
Note: 2696070
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20192283

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