Skip to main content

Did Negative Interest Rates Improve Bank Lending?

Abstract

Since 2012 several central banks have introduced a negative interest rate policy (NIRP) aimed at boosting real spending by facilitating an increase in the supply and demand for bank loans. We employ a bank-level dataset comprising 6558 banks from 33 OECD member countries over 2012–2016 and a matched difference-in-differences estimator to analyze whether NIRP resulted in a change in bank lending in NIRP-adopter countries compared to those that did not adopt the policy. Our results suggest that following the introduction of negative interest rates, bank lending was weaker in NIRP-adopter countries. The result is robust to a wide range of checks. This adverse NIRP effect appears to have been stronger for banks that were smaller, more dependent on retail deposit funding, less well capitalized, had business models reliant on interest income, and operated in more competitive markets.

This is a preview of subscription content, access via your institution.

Notes

  1. 1.

    See Bech and Malkhozov (2016) for a discussion of the implementation mechanisms of NIRP in adopting countries. The time of introduction of NIRP is noted in Table 7 in the Appendix.

  2. 2.

    Our later empirical analysis tests dimensions of the Brunnermeier and Koby (2016) hypothesis.

  3. 3.

    A related literature focuses on the broader macroeconomic effects of LSAPs (e.g., Lenza et al. 2010; Baumeister and Benati 2013; Fujiwara, 2004; Berkmen 2012; Schenkelberg and Watzka 2013; Kapetanios et al. 2012) and generally finds a positive—albeit often small—impact of LSAPs on output and inflation.

  4. 4.

    To be more specific regarding the dummy variable timings we look at the accounting reporting date of all banks in our sample as there are banks that report in different periods of the year and others just at the end. If a bank reports in a period that is before or in the same month of the date of introduction we set the dummy post at 0. Orbis Bank Focus allows you to distinguish between these banks as it gives the reporting accounting date for all the banks in our sample. For Europe NIRP was introduced in June 2014, so we set the dummy variable post equal 1 from the end of 2014, and also for Denmark and Hungary. The six months gap between date of introduction and the dummy post are essential to investigate the effect on lending. For countries like Sweden and Switzerland that introduced NIRP at the beginning of 2015 (January for Switzerland and February for Sweden) the dummy post is set equal 1 for banks that report accounting data either in the middle of the year or at the end.

  5. 5.

    We include country-specific dummies to control for time-invariant, unobservable country characteristics that can shape bank lending. We include year fixed effects to control for possible shocks over the sample period that can affect bank lending such as other monetary policies and changes in regulation. All regressions are estimated with bank-level clustering, namely allowing for correlation in the error terms. We use robust standard errors to control for heteroscedasticity and dependence (see Bertrand et al. (2004); Petersen (2009) and Donald and Lang (2007).

  6. 6.

    The sample period is intentionally short. According to Roberts and Whited (2012) and Bertrand et al. (2004) the change in the treatment group should be concentrated around the onset of the treatment. Moving away leads to unobservable and other factors that affect the treatment outcome threatening the validity of the model.

  7. 7.

    We exclude Japan in our sample as the country only adopted NIRP in early 2016, which provides too short of a period to examine the impact of NIRP on bank lending.

  8. 8.

    The bank lending surveys from ECB and FED are available at:

    1. 1)

      https://www.federalreserve.gov/boarddocs/snloansurvey/

    2. 2)

      https://www.ecb.europa.eu/stats/money/surveys/lend/html/index.en.html

  9. 9.

    We follow Bertrand and Mullainathan (2003) and Jayaratne and Strahan (1996) that use different control groups as a further test to control for the omitted variables problem. Multiple control and treatment groups reduce biases and unobservable variables associated with just one comparison.

  10. 10.

    As already mentioned in section 4.2, splitting control and treatment groups in different sub-groups allows us also to reduce bias and unobservable variables associated with just one comparison.

  11. 11.

    The US Department of Justice ‘generally considers markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated’. https://www.justice.gov/atr/herfindahl-hirschman-index. We recognize that there are shortcomings with using the HHI as a proxy for competitive conditions. There are different views about competition and concentration in the literature. Claessens and Laeven (2003), for example, point out that there are some countries, such as USA, that show levels of monopolistic competition in banking despite the large number of banks, while countries like Canada are highly competitive, although the number of banks is relatively small. For this reason we also cross-checked using Boone and Lerner indicators. These estimations are available upon request.

References

  1. Agarwal S, Chomsisengphet S, Mahoney N, Stroebel J (2018) Do banks pass through credit expansion to consumers who want to borrow? Q J Econ 133:129–190

    Article  Google Scholar 

  2. Altunbas Y, Gambacorta L, Marqués-Ibáñez D (2014) Does monetary policy affect bank risk-taking? The International Journal of Central Banking:95–136

  3. Arteta C, Kose MA, Stocker M, Taskin T (2016) Negative interest rate policies: sources and implications, World Bank policy research paper 7791. World Bank, Washington DC

    Book  Google Scholar 

  4. Ball L, Gagnon J, Honohan P, Krogstrup S (2016) What else can central banks do? Geneva reports on the world economy 18, the International Center for Monetary and Banking Studies (ICMB) and the Centre for Economic Policy Research (CEPR). ICBM: Zurich and CEPR: London

  5. Baumeister C, Benati L (2013) Unconventional monetary policy and the great recession – estimating the impact of a compression in the yield spread at the zero lower bound. Int J Cent Bank:165–212

  6. Bech M, Malkhozov A (2016) How have central banks implemented negative policy rates? Bank for International Settlements Quarterly Review:31–44

  7. Berger AN, Black LK, Bouwman CHS, Dlugosz J (2017) Bank loan supply responses to Federal Reserve emergency liquidity facilities. J Financ Intermed 32:1–15

    Article  Google Scholar 

  8. Berkmen P (2012) Bank of Japan’s quantitative and credit easing: are they now more effective? International Monetary Fund working paper 12/2. IMF, Washington DC

    Google Scholar 

  9. Bernanke B, Reinhart V (2004) Conducting monetary policy at very low short-term interest rates. Am Econ Rev 94(2):85–90

    Article  Google Scholar 

  10. Bertrand M, Mullainathan S (2003) Enjoying the quiet life? Corporate governance and managerial preferences. J Polit Econ 111:1043–1075

    Article  Google Scholar 

  11. Bertrand M, Duflo E, Mullainathan S (2004) How much should we trust difference-in-differences estimates? Q J Econ 119:249–275

    Article  Google Scholar 

  12. Blundell R, Costa Dias M (2002) Alternative approaches to evaluation in empirical microeconomics. Port Econ J 1:91–115

    Article  Google Scholar 

  13. Bowman D, Cai F, Davies S, Kamin S (2015) Quantitative easing and bank lending: evidence from Japan. J Int Money Financ 57:15–30

    Article  Google Scholar 

  14. Bräuning F, Wu B (2017) ECB monetary policy transmission during normal and negative interest rate periods. https://doi.org/10.2139/ssrn.2940553

  15. Butt N, Churmz R, McMahon M, Morotzz A, Jochen Schanz J (2014) QE and the bank lending channel in the United Kingdom, Bank of England working paper 511. Bank of England, London

    Book  Google Scholar 

  16. Brunnermeier MK, Koby Y (2016) The reversal interest rate: the effective lower bound of monetary policy. Princeton University Department of economics working paper. https://scholar.princeton.edu/sites/default/files/markus/files/08f_reversalrate.pdf

  17. Brunnermeier MK, Sannikov Y (2016) The I theory of money. Princeton University Department of economics working paper. https://scholar.princeton.edu/sites/default/files/markus/files/10r_theory.pdf

  18. Carlson M, Shan H, Warusawitharana M (2013) Capital ratios and bank lending: a matched bank approach. J Financ Intermed 22(4):603–687

    Article  Google Scholar 

  19. Chakraborty I, Goldstein I, MacKinlay A (2017) Monetary stimulus and bank lending. Finance down under 2017 building on the best from the cellars of finance. 10.2139/ssrn.2734910

  20. Claessens S, Laeven L (2003) What drives bank competition? Some international evidence. J Money Credit Bank 36(3):563–583

    Google Scholar 

  21. Curdia V, Woodford M (2011) The central bank’s balance sheet as an instrument of monetary policy. J Monet Econ 58(1):54–79

    Article  Google Scholar 

  22. Demiralp S, Eisenschmidt J, Vlassopoulos T (2017) Negative interest rates, excess liquidity and bank business models: banks’ reaction to unconventional monetary policy in the euro area. Koç University-TUSIAD economic research forum working papers 1708, Koc University-TUSIAD Economic Research Forum

  23. Dell’Ariccia G, Laeven L, Marquez R (2014) Real interest rates, leverage and bank risk taking. J Econ Theory 149(1):65–99

    Article  Google Scholar 

  24. Del Negro M, Eggertsson GB, Ferrero A, Kiyotaki N (2017) The great escape? A quantitative evaluation of the Fed’s liquidity facilities. Am Econ Rev 107(3):824–857

    Article  Google Scholar 

  25. Di Maggio M, Kermani A, Palmer C (2016) How quantitative easing works: evidence on the refinancing channel, National Bureau of economic research working paper no. 22638. NBER, Washington DC

    Book  Google Scholar 

  26. Donald S, Lang K (2007) Inference with difference-in-differences and other panel data. Rev Econ Stat 89(2):221–233

    Article  Google Scholar 

  27. Drechsler I, Savov A, Schnabl P (2016) The deposits channel of monetary policy, National Bureau of economic research working paper no. 22152. NBER, Washington DC

    Book  Google Scholar 

  28. Eggertsson G, Woodford M (2003) The zero bound on interest rates and optimal monetary policy. Brook Pap Econ Act 34(1):139–235

    Article  Google Scholar 

  29. Fujiwara I (2004) Evaluating monetary policy when nominal interest rates are almost zero. Journal of the Japanese and International Economy 20(3):434–453

    Article  Google Scholar 

  30. Gambacorta L, Mistrulli PE (2004) Does bank capital affect lending behavior? J Financ Intermed 13(4):436–457

    Article  Google Scholar 

  31. Gambacorta L, Hofmann B, Peersman G (2014) The effectiveness of unconventional monetary policy at the zero lower bound: a cross-country analysis. J Money Credit Bank 46(4):615–642

    Article  Google Scholar 

  32. Heider F, Saidi F, Schepens G (2017) Life below zero: bank lending under negative policy rates. Available at SSRN: https://ssrn.com/abstract=2788204

  33. Heckman J, Ichimura H, Smith JA, Todd P (1998) Characterizing selection bias using experimental data. Econometrica 65:1017–1098

    Article  Google Scholar 

  34. Jayaratne J, Strahan PE (1996) The finance-growth nexus: evidence from bank branch deregulation. Q J Econ 101:639–670

    Article  Google Scholar 

  35. Jimenez G, Ongena S, Peydro J-L (2012) Credit supply and monetary policy: identifying the bank balance-sheet channel with loan applications. Am Econ Rev 102(5):2301–2326

    Article  Google Scholar 

  36. Jimenez G, Ongena S, Peydro J-L, Saurina J (2014) Hazardous times for monetary policy: what do twenty-three million bank loans say about the effects of monetary policy on credit risk-taking? Econometrica 82(2):463–505

    Article  Google Scholar 

  37. Jobst A, Lin H (2016) Negative interest rate policy (NIRP): implications for monetary transmission and bank profitability in the euro area, International Monetary Fund working paper 16/172. IMF, Washington D.C

    Google Scholar 

  38. Kandrac J, Schulsche B (2017) Quantitative easing and bank risk taking: evidence from lending. Available from. 10.2139/ssrn.2684548

  39. Kapetanios G, Mumtaz H, Stevens I, Theodoridis K (2012) Assessing the economy-wide effects of quantitative easing. Econ J 122(564):316–347

    Article  Google Scholar 

  40. Kashyap AK, Stein JC (2000) What do a million observations on banks say about the transmission of monetary policy? Am Econ Rev 90(3):407–428

    Article  Google Scholar 

  41. Lenza M, Pill H, Reichlin L (2010) Monetary policy in exceptional times. Econ Policy 25(62):295–339

    Article  Google Scholar 

  42. Maddaloni A, Peydro JL (2011) Bank risk-taking, securitization, supervision, and low interest rate: evidence from the euro-area and the U.S lending standards. Rev Financ Stud 24(6):2121–2165

    Article  Google Scholar 

  43. McAndrews J (2015) Negative nominal central bank policy rates: where is the lower bound? Remarks at the University of Wisconsin, New York Federal Reserve Speeches. https://www.newyorkfed.org/newsevents/speeches/2015/mca150508.html

  44. Petersen M (2009) Estimating standard error in finance panel dataset: comparing approaches. Rev Financ Stud 22(1):435–480

    Article  Google Scholar 

  45. Roberts MR, Whited TM (2012) Endogeneity in empirical corporate finance. In: GM Constantinides GM, Harris M, and Stulz RM (eds), Handbook of the economics of finance, volume 2 part a, chapter 7, 493–572. New York: Elsevier

    Chapter  Google Scholar 

  46. Rodnyansky A, Darmouni O (2017) The effects of quantitative easing on bank lending behavior. Rev Financ Stud 30(11):3858–3887

    Article  Google Scholar 

  47. Rosenbaum PR, Rubin DB (1983) The central role of the propensity score in observational studies for causal effects. Biometrika 70:41–55

    Article  Google Scholar 

  48. Sääskilahti J (2018) Retail bank interest margins in low interest rate environments. J Financ Serv Res 53(1):37–68

    Article  Google Scholar 

  49. Sørensen KC, Werner T (2006) Bank interest rate pass-through in the euro area: a cross-country comparison, European Central Bank working paper series 580. ECB, Frankfurt

    Google Scholar 

  50. Schenkelberg H, Watzka S (2013) Real effects of quantitative easing at the zero lower bound: structural VAR-based evidence from Japan. J Int Money Financ 33:327–357

    Article  Google Scholar 

  51. Wallace N (1981) A Modigliani-miller theorem for open-market operations. Am Econ Rev 71(3):267–274

    Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Phil Molyneux.

Additional information

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

The views expressed in this paper are those of the authors and should not be attributed to the organizations that they represent.

Appendix

Appendix

Table 7 Time of Adoption of NIRP

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Molyneux, P., Reghezza, A., Thornton, J. et al. Did Negative Interest Rates Improve Bank Lending?. J Financ Serv Res 57, 51–68 (2020). https://doi.org/10.1007/s10693-019-00322-8

Download citation

Keywords

  • Negative interest rates
  • Monetary policy transmission
  • Bank lending
  • Difference in differences estimation
  • Propensity score matching

JEL Classification

  • E43
  • E44
  • E52
  • G21
  • F34