DP15611 Banks and Negative Interest Rates

Author(s): Florian Heider, Farzad Saidi, Glenn Schepens
Publication Date: December 2020
Keyword(s): bank lending, bank risk taking, deposits, euro-area heterogeneity, Negative Interest Rates, zero lower bound
JEL(s): E44, E52, E58, G20, G21
Programme Areas: Financial Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15611

In this paper, we survey the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks' retail deposit rates is hindered by a zero lower bound. We summarize existing work on the impact of negative rates on banks' lending and securities portfolios, and the consequences for the real economy. Finally, we discuss the role of different "initial" conditions when the policy rate becomes negative, and potential interactions between negative policy rates and other unconventional monetary policies.