The long-term impact of negative interest rates on bank lending
In this paper, Arce et al. study the effect of the ECB’s negative deposit facility rate on the supply of credit by Spanish banks to non-financial corporations from 2014 to 2019. Their emphasis on the longer time period enables them to look at the effect of negative rates over a prolonged period of time. They build a unique dataset consisting of loans granted to Spanish firms from the Credit Register of the Bank of Spain, banks’ and firms’ balance sheets and confidential survey data from the ECB’s Bank Lending Survey (BLS). They find:
- Banks adversely affected by the negative interest rates curtailed
their lending supply to firms (relative to non-affected banks) only during the last sub-sample period (2018-2019), while there is no effect during earlier periods;
- Banks with low capital ratios contract their lending supply first to risky firms prior to restricting it to safe firms and by a greater magnitude;
- Lower supply of credit by affected low-capitalized banks seems to be offset by the higher lending supply from non-affected banks which have the capacity for taking additional risks.
Adapting lending policies in a “negative-for-long” scenario
Authors: Oscar Arce, Miguel Garcia-Posada, Sergio Mayordomo, Steven Ongena
From: Banco de España, University of Zurich
A more granular look that leads to different results
In this paper, Romina Ruprecht develops a dynamic general equilibrium model, where banks provide credit to firms with heterogeneous investment opportunities in an excess reserve environment. In this model lending rates depend proportionally on the marginal product of capital, the bargaining power of banks and the money market rate. Ruprecht’s model indicates that:
- Unconstrained banks have to offer a lower lending rate to compensate for the higher loan sizes, while constrained banks can increase lending rates because highly productive firms want to borrow as much possible and are willing to pay a higher price for the loan.
- The effect on the individual lending rates and the compositional effect imply that the dispersion of lending rates increases with a decrease in the interest rate on excess reserves.
- The overall effect on average lending rates depends on the relative size of the effect on constrained banks, the effect on unconstrained banks and the compositional effect.
- Ruprecht’s conclusion, is in contrast to Arce et al. above:
I find that a decrease in the policy rates leads to decreasing aggregate bank lending, increasing lending rates and a higher dispersion of lending rates. Recent observations of lending rates in Switzerland, Sweden and Italy provide some support for this theoretical finding.
Negative Interest Rates and Bank Lending Rates
Author: Romina Ruprecht
From: Federal Reserve Board
