Discussion paper

DP13191 Life below zero: Bank lending under negative policy rates

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 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.

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Citation

Heider, F, F Saidi and G Schepens (eds) (2018), “DP13191 Life below zero: Bank lending under negative policy rates”, CEPR Press Discussion Paper No. 13191. https://cepr.org/publications/dp13191