Working Paper: CEPR ID: DP14988
Authors: Jos Luis Peydro; Johannes Bubeck; Angela Maddaloni
Abstract: We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans.
Keywords: negative rates; nonstandard monetary policy; reach-for-yield; securities; banks
JEL Codes: E43; E52; E58; G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Negative monetary policy rates (E52) | banks' reach-for-yield behaviour (G21) |
| banks' reach-for-yield behaviour (G21) | investment in higher-yielding securities (G11) |
| Higher ratio of customer deposits relative to total assets (G21) | holdings of securities yielding higher returns (G12) |
| Negative monetary policy rates (E52) | increased risk-taking in loan portfolios (G21) |
| Negative monetary policy rates (E52) | increased risk in both securities and loans (G21) |