Working Paper: CEPR ID: DP13191
Authors: Florian Heider; Farzad Saidi; Glenn Schepens
Abstract: 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.
Keywords: negative interest rates; deposits; zero lower bound; bank balance-sheet channel; bank risk-taking channel
JEL Codes: E44; E52; E58; G20; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| negative policy rates (E43) | greater risk-taking behavior (D91) |
| negative policy rates (E43) | reduction in lending (G21) |
| bank's deposit ratio (G21) | riskiness of the firms financed (G32) |
| bank's deposit ratio (G21) | lending volume (G21) |
| greater risk-taking behavior (D91) | reduction in lending (G21) |