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The channels of banks’ response to negative interest rates

Author

Listed:
  • Whelsy Boungou

    (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux)

  • Paul Hubert

    (Banque de France - Banque de France - Banque de France, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

Faced with a potential zero lower bound on deposit interest rates, how do banks pass on the fall in net interest income due to negative interest rates? This paper aims to investigate the different channels of banks' responses to negative interest rates using a detailed breakdown of the profit and loss account of 3637 banks in 59 countries from 2011 to 2018. We find that the decrease in interest income due to negative interest rates is mitigated by an increase in non-interest income, but only partially. We find that banks respond to that shock by reducing the interest paid on non-customer deposit liabilities and their personnel expenses. We also show that banks' responses are not instantaneous and that they adjust their response as negative interest rates persist over time such that how long negative interest rates are implemented matters. Finally, our results suggest that large banks with higher deposits and higher leverage ratios are the most affected by the implementation of negative interest rates.

Suggested Citation

  • Whelsy Boungou & Paul Hubert, 2020. "The channels of banks’ response to negative interest rates," Sciences Po Economics Publications (main) hal-03520719, HAL.
    • Handle: RePEc:hal:spmain:hal-03520719
    DOI: 10.1016/j.jedc.2021.104228
    Note: View the original document on HAL open archive server: https://hal.science/hal-03520719v1
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    2. Boungou, Whelsy, 2021. "Empirical evidence of the lending channel of monetary policy under negative interest rates," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 309-318.
    3. Whelsy Boungou & Charles Mawusi, 2022. "The impact of economic policy uncertainty on banks' non-interest income activities," International Economics, CEPII research center, issue 169, pages 89-97.

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    Keywords

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    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G2 - Financial Economics - - Financial Institutions and Services

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