Working Paper: CEPR ID: DP16191
Authors: Andreas Fuster; Tan Schelling; Pascal Towbin
Abstract: As negative interest rates exert pressure on bank profitability, several central banks have introduced reserve tiering systems to lessen the burden. Reserve tiering means that banks are only charged the negative policy rate above a certain threshold of reserves. Altering the threshold affects bank profits and therefore has potential effects on the macroeconomy and financial stability. However, assessing these effects is challenging, because the introduction or modification of reserve tiers has usually been accompanied by other monetary policy actions, such as rate changes or quantitative easing measures. We are able to circumvent these issues by exploiting an unexpected decision by the Swiss National Bank in September 2019 to change the threshold calculation without taking any other policy actions. This change led to a large increase in overall exemptions, but with variation across banks. Using a difference-in-differences approach, we find that banks that experience a larger increase in their exemption threshold tend to raise their SNB sight deposit holdings, funded through more interbank borrowing and more customer deposits. The interbank market is important for the funding choice: banks with low collateral holdings (a proxy for market access) use less interbank borrowing and instead grow their customer deposits; they also pass on negative rates on a smaller share of their deposits. Effects on bank lending behavior are moderate; if anything, banks that benefit from a larger increase in the exemption threshold tend to charge higher spreads and take less risk.
Keywords: reserve tiering; negative interest rates; banking; bank risk-taking channel
JEL Codes: E52; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in exemption threshold (H26) | Increase in SNB sight deposit holdings (E49) |
| Increase in exemption threshold (H26) | Increased interbank borrowing (F65) |
| Increase in exemption threshold (H26) | Increased customer deposits (G21) |
| Low collateral holdings (G33) | Less interbank borrowing (F65) |
| Low collateral holdings (G33) | More reliance on customer deposits (G21) |
| Increase in exemption threshold (H26) | Higher lending spreads (G21) |
| Increase in exemption threshold (H26) | Less risk-taking behavior (D91) |
| Less profitability pressure (L19) | Higher lending spreads (G21) |
| Increase in exemption threshold (H26) | Shift in risk-taking behavior (D91) |