How Banks Respond To Negative Interest Rates
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Author | : Andreas Jobst |
Publisher | : International Monetary Fund |
Total Pages | : 48 |
Release | : 2016-08-10 |
Genre | : Business & Economics |
ISBN | : 1475524471 |
More than two years ago the European Central Bank (ECB) adopted a negative interest rate policy (NIRP) to achieve its price stability objective. Negative interest rates have so far supported easier financial conditions and contributed to a modest expansion in credit, demonstrating that the zero lower bound is less binding than previously thought. However, interest rate cuts also weigh on bank profitability. Substantial rate cuts may at some point outweigh the benefits from higher asset values and stronger aggregate demand. Further monetary accommodation may need to rely more on credit easing and an expansion of the ECB’s balance sheet rather than substantial additional reductions in the policy rate.
Author | : Luís Brandão Marques |
Publisher | : International Monetary Fund |
Total Pages | : 84 |
Release | : 2021-03-03 |
Genre | : Business & Economics |
ISBN | : 1513570080 |
This paper focuses on negative interest rate policies and covers a broad range of its effects, with a detailed discussion of findings in the academic literature and of broader country experiences.
Author | : Natalya Martynova |
Publisher | : International Monetary Fund |
Total Pages | : 44 |
Release | : 2015-11-25 |
Genre | : Business & Economics |
ISBN | : 1513565818 |
Traditional theory suggests that more profitable banks should have lower risk-taking incentives. Then why did many profitable banks choose to invest in untested financial instruments before the crisis, realizing significant losses? We attempt to reconcile theory and evidence. In our setup, banks are endowed with a fixed core business. They take risk by levering up to engage in risky ‘side activities’(such as market-based investments) alongside the core business. A more profitable core business allows a bank to borrow more and take side risks on a larger scale, offsetting lower incentives to take risk of given size. Consequently, more profitable banks may have higher risk-taking incentives. The framework is consistent with cross-sectional patterns of bank risk-taking in the run up to the recent financial crisis.
Author | : Mr.Giovanni Dell'Ariccia |
Publisher | : International Monetary Fund |
Total Pages | : 41 |
Release | : 2013-06-06 |
Genre | : Business & Economics |
ISBN | : 1484381130 |
We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s loan portfolio) is negatively associated with increases in short-term policy interest rates. This relationship is less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally.
Author | : Ruchir Agarwal |
Publisher | : International Monetary Fund |
Total Pages | : 89 |
Release | : 2019-04-29 |
Genre | : Business & Economics |
ISBN | : 1484398777 |
The experience of the Great Recession and its aftermath revealed that a lower bound on interest rates can be a serious obstacle for fighting recessions. However, the zero lower bound is not a law of nature; it is a policy choice. The central message of this paper is that with readily available tools a central bank can enable deep negative rates whenever needed—thus maintaining the power of monetary policy in the future to end recessions within a short time. This paper demonstrates that a subset of these tools can have a big effect in enabling deep negative rates with administratively small actions on the part of the central bank. To that end, we (i) survey approaches to enable deep negative rates discussed in the literature and present new approaches; (ii) establish how a subset of these approaches allows enabling negative rates while remaining at a minimum distance from the current paper currency policy and minimizing the political costs; (iii) discuss why standard transmission mechanisms from interest rates to aggregate demand are likely to remain unchanged in deep negative rate territory; and (iv) present communication tools that central banks can use both now and in the event to facilitate broader political acceptance of negative interest rate policy at the onset of the next serious recession.
Author | : Mr.Gee Hee Hong |
Publisher | : International Monetary Fund |
Total Pages | : 50 |
Release | : 2018-06-13 |
Genre | : Business & Economics |
ISBN | : 148436161X |
In this paper, we investigate how negative interest rate policy (NIRP) introduced in January 2016 by the Bank of Japan (BoJ) affected Japanese banks' lending and risk taking behavior. The BoJ's announcement was an unexpected surprise to the market and was followed by a sharp drop in equity prices of Japanese financial firms. We exploit the cross-sectional variation in the change of share prices on the day of the announcement to measure banks' differential exposure to NIRP. We show that more exposed banks increased their credit and took on more risk compared to banks that were less exposed to negative rates.
Author | : Margherita Bottero |
Publisher | : International Monetary Fund |
Total Pages | : 59 |
Release | : 2019-02-28 |
Genre | : Business & Economics |
ISBN | : 1498300855 |
We study negative interest rate policy (NIRP) exploiting ECB's NIRP introduction and administrative data from Italy, severely hit by the Eurozone crisis. NIRP has expansionary effects on credit supply-- -and hence the real economy---through a portfolio rebalancing channel. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets, not with higher retail deposits. NIRP-affected banks rebalance their portfolios from liquid assets to credit—especially to riskier and smaller firms—and cut loan rates, inducing sizable real effects. By shifting the entire yield curve downwards, NIRP differs from rate cuts just above the ZLB.
Author | : Jacques Ninet |
Publisher | : Emerald Group Publishing |
Total Pages | : 224 |
Release | : 2020-11-26 |
Genre | : Business & Economics |
ISBN | : 1839823763 |
This volume of Critical Studies on Corporate Responsibility, Governance and Sustainability titled Negative Interest Rates: The Black Hole of Financial Capitalism is the English translation of and already published french book about Financial Capitalism. It explores the themes and the consequences of Negative interest and capitalism.
Author | : |
Publisher | : Lulu.com |
Total Pages | : 294 |
Release | : 2004 |
Genre | : Bank capital |
ISBN | : 9291316695 |
Author | : Ruchir Agarwal |
Publisher | : International Monetary Fund |
Total Pages | : 40 |
Release | : 2015-10-23 |
Genre | : Business & Economics |
ISBN | : 1513536915 |
There has been much discussion about eliminating the “zero lower bound” by eliminating paper currency. But such a radical and difficult approach as eliminating paper currency is not necessary. Much as during the Great Depression—when countries were able to revive their economies by going off the gold standard—all that is needed to empower monetary policy to cut interest rates as much as needed for economic stimulus now is to change from a paper standard to an electronic money standard, and to be willing to have paper currency go away from par. This paper develops the idea further and shows how such a mechanism can be implemented in a minimalist way by using a time-varying paper currency deposit fee between private banks and the central bank. This allows the central bank to create a crawling-peg exchange rate between paper currency and electronic money; the paper currency interest rate can be either lowered below zero or raised above zero. Such an ability to vary the paper currency interest rate along with other key interest rates, makes it possible to stimulate investment and net exports as much as needed to revive the economy, even when inflation, interest rates, and economic activity are quite low, as they are currently in many countries. The paper also examines different options available to the central bank to return to par when negative interest rates are no longer needed, and the associated implications for the financial sector and debt contracts. Finally, the paper discusses various legal, political, and economic challenges of putting in place such a framework and how policymakers could address them.