Crossing the zero lower bound: credit supply under negative policy rates

This paper studies how banks’ balance sheets before the negative interest rate policy (NIRP) shaped credit supply and loan pricing around the ECB’s first move into negative territory in June 2014. We identify heterogeneous credit responses by comparing the lending decisions of different banks lending to the same firm. We find that banks with higher reliance on deposit funding prior to NIRP contract credit supply and cut loan rates more over the subsequent months, consistent with deposit rate rigidity and banks’ funding structure shaping the adjustment of both credit supply and loan pricing when policy rates turn negative. In contrast, banks with stronger liquidity positions expand credit more and cut loan rates less, suggesting that securities holdings provide a buffer that supports lending under negative policy rates. The effects on lending volumes are concentrated among ex-ante safer firms, indicating that balance sheet constraints primarily operate through credit reallocation towards borrowers with greater access to alternative funding sources.