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The development of bank profitability in Denmark, Sweden and Switzerland during a period of ultra-low and negative interest rates

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Abstract

In June 2014, the ECB decided to lower its interest rate on the deposit facility for the first time to below zero with the aim of countering deflation risks. Negative central bank interest rates have no precedent in history and thus raise questions about potential unintended side effects on the economy and the banking system. To evaluate the risks of such side effects, we investigate the development of bank profitability in three European countries that look back on more than one year of negative interest rates: Denmark, Sweden and Switzerland. Overall we conclude that in these countries, negative interest rates have so far not resulted in a significant reduction of bank profitability and particularly of net interest income. Declines in interest income have been more than compensated for by declines in interest expenses. Most fears about unintended consequences of negative interest rates, such as a rush to cash or a reduction of credit supply, have so far not materialized.

Suggested Citation

  • Thomas Scheiber & Maria Antoinette Silgoner & Caroline Stern, 2016. "The development of bank profitability in Denmark, Sweden and Switzerland during a period of ultra-low and negative interest rates," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 8-28.
  • Handle: RePEc:onb:oenbfi:y:2016:i:3:b:1
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    File URL: https://www.oenb.at/dam/jcr:e1d6151c-a826-4c08-b82d-dfdac002bebe/feei_2016_q3_studies01_scheiber_silgoner_stern.pdf
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    References listed on IDEAS

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    1. Pablo Antolin & Sebastian Schich & Juan Yermo, 2011. "The Economic Impact of Protracted Low Interest Rates on Pension Funds and Insurance Companies," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2011(1), pages 237-256.
    2. Morten Linnemann Bech & Aytek Malkhozov, 2016. "How have central banks implemented negative policy rates?," BIS Quarterly Review, Bank for International Settlements, March.
    3. Anamaria Illes & Marco Lombardi & Paul Mizen, 2015. "Why did bank lending rates diverge from policy rates after the financial crisis?," BIS Working Papers 486, Bank for International Settlements.
    4. Stijn Claessens & Nicholas Coleman & Michael S. Donnelly, 2016. ""Low-for-Long" Interest Rates and Net Interest Margins of Banks in Advanced Foreign Economies," IFDP Notes 2016-04-11-1, Board of Governors of the Federal Reserve System (U.S.).
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    More about this item

    Keywords

    low interest rate environment; monetary transmission; bank profitability;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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