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Why Have Negative Nominal Interest Rates Had Such a Small Effect on Bank Performance? Cross Country Evidence

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  • Jose A. Lopez
  • Andrew K. Rose
  • Mark M. Spiegel

Abstract

We examine the effect of negative nominal interest rates on bank profitability and behavior using a cross-country panel of over 5,100 banks in 27 countries. Our data set includes annual observations for Japanese and European banks between 2010 and 2016, which covers all advanced economies that have experienced negative nominal rates, including currency union members as well as both fixed and floating exchange rates countries. When we compare negative nominal interest rates with low positive rates, banks experience losses in interest income that are almost exactly offset by savings on deposit expenses and gains in non-interest income, including capital gains on securities and fees. We find heterogeneous effects of negative rates: floating exchange rates, small banks, and banks with low deposit ratios drive most of our results. Low-deposit banks have enjoyed particularly striking gains in non-interest income, likely from capital gains on securities. There have only been modest differences between high and low deposit-ratio banks? changes in interest expenses; high deposit banks do not seem disproportionately vulnerable to negative rates. Overall, our results indicate surprisingly benign implications of negative rates for commercial banks thus far.

Suggested Citation

  • Jose A. Lopez & Andrew K. Rose & Mark M. Spiegel, 2018. "Why Have Negative Nominal Interest Rates Had Such a Small Effect on Bank Performance? Cross Country Evidence," Working Paper Series 2018-7, Federal Reserve Bank of San Francisco, revised 20 Jun 2018.
  • Handle: RePEc:fip:fedfwp:2018-07
    DOI: 10.24148/wp2018-07
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Negative Nominal Interest Rates and Banking
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2018-10-22 12:23:45
    2. Negative Nominal Interest Rates: A Primer
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2019-12-02 13:10:33

    Citations

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    Cited by:

    1. Nicolas Reigl & Karsten Staehr, 2020. "Negative Interest Rates in the Five Eurozone Countries from Central and Eastern Europe," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 21(01), pages 24-30, April.
    2. Eric T. Swanson, 2018. "The Federal Reserve Is Not Very Constrained by the Lower Bound on Nominal Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 555-572.
    3. Altavilla, Carlo & Burlon, Lorenzo & Giannetti, Mariassunta & Holton, Sarah, 2019. "Is There a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms," CEPR Discussion Papers 14050, C.E.P.R. Discussion Papers.
    4. Melanie Klein, 2020. "Implications of negative interest rates for the net interest margin and lending of euro area banks," BIS Working Papers 848, Bank for International Settlements.
    5. Bottero, Margherita & Minoiu, Camelia & Peydro, Jose-Luis & Polo, Andrea & Presbitero, Andrea & Sette, Enrico, 2019. "Expansionary Yet Different: Credit Supply and Real Effects of Negative Interest Rate Policy," CEPR Discussion Papers 14233, C.E.P.R. Discussion Papers.
    6. Demiralp, Selva & Eisenschmidt, Jens & Vlassopoulos, Thomas, 2019. "Negative interest rates, excess liquidity and retail deposits: banks’ reaction to unconventional monetary policy in the euro area," Working Paper Series 2283, European Central Bank.
    7. Mayu Kikuchi & Alfred Wong & Jiayue Zhang, 2019. "Risk of window dressing: quarter-end spikes in the Japanese yen Libor-OIS spread," Journal of Regulatory Economics, Springer, vol. 56(2), pages 149-166, December.
    8. Molyneux, Philip & Reghezza, Alessio & Xie, Ru, 2019. "Bank margins and profits in a world of negative rates," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    9. Oliver de Groot & Alexander Haas, 2020. "The Negative Interest Rate Policy Experiment," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 21(01), pages 7-12, April.
    10. Matěj Maivald & Petr Teplý, 2020. "The impact of low interest rates on banks’ non-performing loans," FFA Working Papers 2.002, University of Economics, Prague, revised 25 Feb 2020.
    11. Klein, Melanie, 2020. "Implications of negative interest rates for the net interest margin and lending of euro area banks," Discussion Papers 10/2020, Deutsche Bundesbank.
    12. Raymond Chaudron & Leo de Haan & Marco Hoeberichts, 2020. "Banks' net interest margins and interest rate risk: communicating vessels?," DNB Working Papers 675, Netherlands Central Bank, Research Department.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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