Negative interest rates, excess liquidity and retail deposits: Banks' reaction to unconventional monetary policy in the euro area
Negative interest rate policy (NIRP) is associated with a particular friction. The remuneration of banks' retail deposits tends to be floored at zero, which limits the typical transmission of policy rate cuts to bank funding costs. We investigate whether this friction affects banks' reactions under NIRP compared to a standard rate cut in the euro area. We argue that reliance on retail deposit funding and the level of excess liquidity holdings may increase banks' responsiveness to NIRP. We find evidence that banks highly exposed to NIRP tend to grant more loans. This confirms studies pointing to higher risk taking by banks under NIRP and contrasts results that associate NIRP with a contraction in bank loans. Broader coverage of our loan data and the explicit consideration of banks' excess liquidity holdings are likely reasons for this different result compared to some earlier literature. We are the first to document the importance of banks' excess liquidity holdings for the effectiveness of NIRP, pointing to a strong complementarity of NIRP with central bank liquidity injections, e.g. via asset purchases.
Year of publication: |
2019
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Authors: | Demiralp, Selva ; Eisenschmidt, Jens ; Vlassopoulos, Thomas |
Publisher: |
Istanbul : Koç University-TÜSIAD Economic Research Forum (ERF) |
Subject: | negative rates | bank balance sheets | monetary transmission mechanism |
Saved in:
freely available
Series: | Working Paper ; 1910 |
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Type of publication: | Book / Working Paper |
Type of publication (narrower categories): | Working Paper |
Language: | English |
Other identifiers: | 1677232544 [GVK] hdl:10419/227905 [Handle] |
Classification: | E43 - Determination of Interest Rates; Term Structure Interest Rates ; E52 - Monetary Policy (Targets, Instruments, and Effects) ; G11 - Portfolio Choice ; G21 - Banks; Other Depository Institutions; Mortgages |
Source: |
Persistent link: https://www.econbiz.de/10012388926