Negative interest rates, excess liquidity and retail deposits: Banks' reaction to unconventional monetary policy in the euro area

Arbeitspapier

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.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Working Paper ; No. 1910

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Interest Rates: Determination, Term Structure, and Effects ; Monetary Policy ; Portfolio Choice; Investment Decisions ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Thema: negative rates ; bank balance sheets ; monetary transmission mechanism

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Demiralp, Selva ; Eisenschmidt, Jens ; Vlassopoulos, Thomas
• Ereignis: Veröffentlichung
• (wer): Koç University-TÜSIAD Economic Research Forum (ERF)
• (wo): Istanbul
• (wann): 2019

Weitere Informationen

• Handle: http://hdl.handle.net/10419/227905
• Letzte Aktualisierung: 10.03.2025, 11:46 MEZ