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Implications of negative interest rates for the net interest margin and lending of euro area banks

Melanie Klein

No 10/2020, Discussion Papers from Deutsche Bundesbank

Abstract: This paper explores the impact of low (but) positive and negative market interest rates on euro area banks' net interest margin (NIM) and its components, retail lending and retail deposit rates. Using two proprietary bank-level data sets, I find a positive impact of the level of the short-term rate on the NIM, which increases substantially at negative market rates. As low profitability could hamper the ability of banks to expand lending, I also investigate the impact of the NIM on new lending to the non-financial private sector. In general, the NIM is positively related to lending: When lending is less profitable, banks cut lending. However, at negative rates this effect vanishes. This finding suggests that banks adjusted their business practices when servicing new loans, thereby contributing to higher new lending in the euro area since 2014.

Keywords: net interest margin; monetary policy; negative interest rates; bank profitability; lending (search for similar items in EconPapers)
JEL-codes: E43 E52 G21 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mac
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https://www.econstor.eu/bitstream/10419/215403/1/1693213583.pdf (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:102020

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