The channels of banks’ response to negative interest rates

Whelsy Boungou and Paul Hubert

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Abstract: Faced with a potential zero lower bound on deposit interest rates, how do banks pass on the fall in net interest income due to negative interest rates? This paper aims to investigate the different channels of banks' responses to negative interest rates using a detailed breakdown of the profit and loss account of 3637 banks in 59 countries from 2011 to 2018. We find that the decrease in interest income due to negative interest rates is mitigated by an increase in non-interest income, but only partially. We find that banks respond to that shock by reducing the interest paid on non-customer deposit liabilities and their personnel expenses. We also show that banks' responses are not instantaneous and that they adjust their response as negative interest rates persist over time such that how long negative interest rates are implemented matters. Finally, our results suggest that large banks with higher deposits and higher leverage ratios are the most affected by the implementation of negative interest rates.

Keywords: Bank profitability; Interest flows; Non-interest flows; Deposits; Leverage (search for similar items in EconPapers)
Date: 2020-10-01
Note: View the original document on HAL open archive server: https://hal.science/hal-03520719
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Published in Journal of Economic Dynamics and Control, 2020, 131, pp.104228. ⟨10.1016/j.jedc.2021.104228⟩

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Related works:
Journal Article: The channels of banks’ response to negative interest rates (2021)
Working Paper: The channels of banks response to negative interest rates (2021)
Working Paper: The channels of banks’ response to negative interest rates (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-03520719

DOI: 10.1016/j.jedc.2021.104228

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