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Negative interest rates, excess liquidity and bank business models: Banks’ reaction to unconventional monetary policy in the euro area

Listed author(s):
  • S. Demiralp

    ()

    (Koc University)

  • J. Eisenschmidt

    (ECB)

  • T. Vlassopoulos

    (ECB)

In June 2014 the ECB became the first major central bank to lower one of its key policy rates to negative territory. The theoretical and empirical literature is silent on whether banks’ reaction would be different when the policy rate is lowered to negative levels compared to a standard reaction to a rate cut. In this paper we examine this question empirically by using individual bank data for the euro area to identify possible adjustments by banks triggered by the introduction of negative interest rates through three channels: government bond holdings, bank lending, and wholesale funding. We find evidence of a significant adjustment of banks’ balance sheets during the negative interest rate period. Banks tend to extend more loans, hold more non-domestic government bonds and rely less on wholesale funding. The nature and scope of the adjustment depends on banks’ business models.

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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1708.pdf
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Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1708.

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Length: 38 pages
Date of creation: Mar 2017
Handle: RePEc:koc:wpaper:1708
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  1. Clemens Bonner, 2016. "Preferential Regulatory Treatment and Banks' Demand for Government Bonds," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(6), pages 1195-1221, September.
  2. Rita Babihuga & Marco Spaltro, 2014. "Bank Funding Costs for International Banks," IMF Working Papers 14/71, International Monetary Fund.
  3. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
  4. Morten Linnemann Bech & Aytek Malkhozov, 2016. "How have central banks implemented negative policy rates?," BIS Quarterly Review, Bank for International Settlements, March.
  5. Billett, Matthew T & Garfinkel, Jon A, 2004. "Financial Flexibility and the Cost of External Finance for U.S. Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 827-852, October.
  6. 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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