Do negative interest rates make banks less safe?

Nucera, Federico; Lucas, André; Schaumburg, Julia; Schwaab, Bernd

doi:10.1016/j.econlet.2017.07.014

Cited by 55 publications

(17 citation statements)

References 4 publications

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“…In line with the bulk of the literature (Heider et al, 2019, Bubeck et al, 2019, Bottero et al, 2019, we find support for the result that banks highly exposed to NIRP take on more risk, as they effectively convert a risk-less asset -ELinto a risky onebank loans. Moreover, our results in this respect are also consistent with Nucera et al (2017) as well as Boungou (2020), who find that risk-taking under NIRP depends on individual bank characteristics.…”

Section: Introductionsupporting

confidence: 90%

Negative interest rates, excess liquidity and retail deposits: Banks’ reaction to unconventional monetary policy in the euro area

Demiralp

Eisenschmidt

Vlassopoulos

2021

European Economic Review

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Negative interest rate policy (NIRP) is associated with a particular friction. The remuneration of banks´ retail deposits tends to be floored at zero, which limits the transmission of policy rate cuts to bank funding costs. We investigate whether this friction affects banks' reactions under NIRP compared to a standard rate cut in the euro area. We argue that reliance on retail deposit funding and the level of excess liquidity holdings may increase banks' responsiveness to NIRP. We find evidence that banks highly exposed to NIRP tend to grant more loans, i.e. NIRP is indeed expansionary. This confirms studies pointing to higher risk taking by banks under NIRP and contrasts results that associate NIRP with a contraction in bank loans. Broader coverage of our loan data and the explicit consideration of banks' excess liquidity holdings are the reasons for this different result compared to some earlier literature. We are the first to document the importance of banks' excess liquidity holdings for the effectiveness of NIRP, pointing to a strong complementarity of NIRP with central bank liquidity injections, e.g. via asset purchases.

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Section: Introductionsupporting

confidence: 90%

Negative interest rates, excess liquidity and retail deposits: Banks’ reaction to unconventional monetary policy in the euro area

Demiralp

Eisenschmidt

Vlassopoulos

2021

European Economic Review

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“…Basten and Mariathasan (2018) find an increase in RWA for the Swiss banks most affected by the negative interest rates policy. Using a risk measure derived from banks' equity valuations, Nucera et al (2017) find that the risk impact of negative rates depends on banks' business models: large and more diversified banks are perceived as less risky, while smaller and more traditional banks are perceived as more risky.…”

mentioning

confidence: 99%

Negative Monetary Policy Rates and Systemic Banks' Risk‐Taking: Evidence from the Euro Area Securities Register

Bubeck¹,

Maddaloni²,

Peydró³

2020

J of Money Credit Banking

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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 nonfinancial) securities and dollar‐denominated securities. Affected banks also take higher risk in loans.

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“…Whereas we cannot find a significant relation for smaller banks (Panel C), we observe a significant and inverse relation for larger banks (Panel D). In explanation, we allude to greater opportunities to support profitability at larger banks, for instance, changing loan intensity and using cross selling to increase fee and commission incomes (Altunbas et al, 2018;Nucera, 2017). Larger banks show greater tendency to realise economies of scale and scope and are relatively less reliant on retail deposits.…”

Section: Capitalisation Size and Competitionmentioning

confidence: 99%

“…We investigate the impact of bank-specific characteristics and examine what the effects of NIRP are on risk-taking at small banks and at banks with strong capital positions. Whereas NIRP could exert stronger impact on small banks via a deposit channel effect that motivates search for yield, risktaking could be greater at large banks that could realise gains benefits from diversification (Nucera et al 2017;Altunbas et al 2018). The ambiguous relationship between negative rates, capital and risk-taking is sufficient motivation to uncover robust empirical evidence on its true nature.…”

Section: Introductionmentioning

confidence: 99%

“…Following this rationale, capital requirements might also be a reason for the concentration of excess liquidity at country level as low interest rates make the expected return from some kinds of investments (e.g. unsecured overnight lending) not worth the capital cost attached.7 Nucera et al (2017) measure bank risk using the SRisk indicator, which captures the propensity for a bank to become undercapitalised in a financial crisis (Brownlees and Engle, 2017).…”

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confidence: 99%

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Do negative interest rates affect bank risk-taking?

Bongiovanni

Reghezza

Santamaria

et al. 2021

Journal of Empirical Finance

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We offer early evidence on how negative interest rate policy affects bank risk-taking. We identify a dichotomy between monetary policy and prudential regulation. Our primary result suggests NIRP produced an unintended outcome, which we measure as a 10 per cent reduction in banks' holdings of risky assets. It infers that banks deleverage their balance sheets and invest in safer, liquid assets to meet new and binding capital and liquidity requirements. We find risk-taking behaviour is sensitive to capitalisation and banks with stronger capital ratios take more risks. Similarly, tighter prudential requirements could inadvertently retard economic growth should poorly capitalised banks reduce investment in riskier assets in favour of zero risk-weighted assets, such as, sovereign bonds to comply with risk-based capital requirements. Risk-taking is greater in less competitive markets because stronger market power insulates net interest margins and profitability. We obtain our results from a sample of 2,371 banks from 33 OECD countries between 2012 and 2016, and a difference-indifferences framework.

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Do negative interest rates make banks less safe?

Cited by 55 publications

References 4 publications

Negative interest rates, excess liquidity and retail deposits: Banks’ reaction to unconventional monetary policy in the euro area

Negative interest rates, excess liquidity and retail deposits: Banks’ reaction to unconventional monetary policy in the euro area

Negative Monetary Policy Rates and Systemic Banks' Risk‐Taking: Evidence from the Euro Area Securities Register

Do negative interest rates affect bank risk-taking?

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