Life below Zero: Bank Lending under Negative Policy Rates

By Florian Heider, Farzad Saidi, G. Schepens. The Review of financial studies, 2019

407 citations recorded by the source corpus.

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 a 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.Received April 17, 2018; editorial decision September 18, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/be37500d0aab90f38ac7210bd5687121025a0949

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Citations in the corpus

Negative Nominal Interest Rates and the Bank Lending Channel (2019, unknown): “The cross-sectional evidence presented here is consistent with the results in Heider, Saidi, and Schepens (2016) and the survey evidence in Figure 20 in Appendix A, where the vast majority of European banks report that they have not increased lending volumes in response to negative policy rates.”
Macroprudential policy and bank systemic risk (2020, unknown): “Igan and Kang (2011) make use of a regional database to examine the effect of loan-to-value and debt-to-income limits on house price dynamics, residential real estate market activity, and household leverage in Korea.”
Is there a zero lower bound? The effects of negative policy rates on banks and firms (2019, background): “Heider, Saidi, and Schepens (2019) highlight that banks with a higher proportion of funding from households’ deposits have lower propensity to lend to safe borrowers in the syndicated loan market, when rates turn negative.”
The Reversal Interest Rate (2018, unknown): “Heider et al. (2019) show that the median deposit rate in the Euro area stayed very close to (but above) zero following June 2014, even as the policy rate went negative.”
A Tale of Two Decades: The Ecb's Monetary Policy at 20 (2019, background): “Heider et al. (2019) find that banks with a higher share of deposits in total funding display”