Monetary Policy Effects in Times of Negative Interest Rates: What do Bank Stock Prices Tell Us?

Abstract

Do negative interest rates matter for bank performance? This paper investigates whether monetary policy surprises impact bank stock prices differently in times of positive and negative interest rates. The analysis controls for broad stock market movements and finds that an unanticipated downward shift in the yield curve and a flattening of the shorter-end of the yield curve resulting from monetary policy announcements reduce bank stock prices in a low and especially negative interest rate environment. The effects persist in the days after the monetary policy announcement and are larger for banks relatively dependent on deposit funding. By contrast, a surprise movement in the slope of the longer-end of the yield curve does not impact bank stock prices in a negative interest rate environment. The results indicate that when market interest rates are negative but deposit rates stuck at zero, monetary policy instruments that target the longer-end of the yield curve are less detrimental to bank performance than those that target the shorter-end of the yield curve.

Same old song: On the macroeconomic and distributional effects of leaving a Low Interest Rate Environment

“…Most of these studies find that reductions in central banks' policy rate, if carried out under LIRE, prompt a decrease in banks' profitability, both realized and expected. This latter result is in contrast with previous empirical evidence according to which conventional expansionary monetary policy, when implemented in a more traditional interest rate setting, would raise banks' stock market values by feeding economic activity and, hence, improving banks' prospected profitability (see Bats et al, 2020;Ampudia and Van den Heuvel, 2022). Borio et al (2017) go further and claim that the positive relation between central banks' policy rate and banks' profitability is highly non-linear.…”

“…Borio et al (2017), Altavilla et al (2017), andClaessens et al (2018) look 'backward' at realized profits only. Altavilla et al (2017), as well as Bats et al (2020) and Ampudia and Van den Heuvel (2022), extend the analysis to expected future banks' profits as captured by banks' stock market values. Most of these studies find that reductions in central banks' policy rate, if carried out under LIRE, prompt a decrease in banks' profitability, both realized and expected.…”

“…The vast majority of still small but expanding literature about LIRE consists of empirical works analyzing their effects upon some relevant financial variables. Borio et al (2017), Claessens et al (2018), Bats et al (2020), andAmpudia andVan den Heuvel (2022), for instance, all study how monetary policy, namely further cuts in central bank's policy rate, affects banks' profitability in a low (but positive) or negative interest rate setting. Borio et al (2017), Altavilla et al (2017), andClaessens et al (2018) look 'backward' at realized profits only.…”

Making Sense of Negative Nominal Interest Rates

“…By contrast, they do not find such a reversal for long term surprises. Bats et al (2020) measure equity returns for a smaller group of banks, controlling for broad stock market movements, and argue that flattening the yield curve has a smaller negative effect on bank profitability than a yield curve shift. Taken together, these studies add evidence that deposit margin effects are dominant in leading to negatively affected bank profitability.…”

The Transmission of Negative Nominal Interest Rates in Finland

“…As mentioned above, besides simple correlations, these papers have used high-frequency identification, exposure-measure regressions, or cross-country regressions. The papers using high-frequency identification, like Ampudia and van den Heuvel (2019), Bats et al (2020), or Wang (2019), have typically found detrimental effects on bank stock prices from negative rate implementation.…”