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ECB-1: The Impact of Negative Interest Rate Policy
Bank Profitability and Risk Taking When Interest Rates are Negative
1Swiss Financial Market Supervisory Authority FINMA; 2KU Leuven
In this paper, we study banks’ response to the introduction of negative deposit facility rates. Using detailed supervisory information on the balance sheets and income statements of retail banks in Switzerland, and exploiting peculiarities in the timing and design of Swiss monetary policy, we document the transmission of negative interest rates to the interbank market and heterogeneity in the reorganisation of banks’ balance sheets. We show that exposure to negative central bank rates induces a significant decline in net interest income, an off-setting increase in fee income, and investment in ex-ante riskier assets. Our results suggest that monetary transmission remains intact under moderately negative rates. Banks relax the zero lower bound on deposit rates through fees, but that risk-taking also increases.
Monetary Policy and Bank Equity Values in a Time of Low Interest Rates
European Central Bank
This paper studies the effect of monetary policy on bank equity values. We identify monetary policy shocks by looking at changes in the EONIA 1 month swap contract (short-term rate surprise) and the 2 year bund (long-term rate surprise) during narrow windows around the press statements and press conferences announcing monetary policy actions taken by the ECB’s Governing Council. We find that an unexpected increase of 100 basis points on the short-term policy rate decreases banks’ stock prices by 4.7% on average. These effects vary over time; in particular, they were stronger during the crisis period, and reverse during the recent period with low and even negative interest rates. That is, with rates already low or negative, further interest rate cuts became detrimental for banks’ equity values. The composition of banks’ balance sheets is important in order to understand these effects. Banks with high deposit rates are in general less sensitive to changes in interest rates, except when rates are low. We argue that this pattern is consistent with a reluctance of banks to pay negative interest rates on retail deposits.
Limits to Monetary Policy Transmission at the Zero Lower Bound and Beyond: The Role of Nonbanks
Federal Reserve Board
We study monetary policy transmission during the zero lower bound (ZLB) period in the United States and the negative interest policy rate (NIPR) period in Europe in the markets for syndicated corporate term loans. A typical borrowing cost of such a loan is a sum of an index rate, a loan spread, and various fees. In anticipation of the ZLB and NIPR periods, binding interest rate floors on the index rate have been introduced en masse in loan contracts. Nonbank lenders, which tend to target nominal yields, appear to play a key role in contracting in these guaranteed returns with better-known, repeat borrowers. Because floors set an effective "zero" lower bound at 100 basis points, the relationship between monetary policy and borrowing costs has become more tenuous than in the past, in particular in the United States. In addition, as floors tend to be introduced in leveraged, covenant lite loans of larger sizes, financial stability risks may have increased. However, borrowers appear to be able to term out loans, pushing back potential rollover risk.
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Conference: EFA 2017
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