Negative interest rate policy (NIRP) DOES NOT increase credit supply
Heider and al. examine the transmission of NIRP to the supply of bank credit using a difference-in-differences approach. They compare the lending behavior of banks with different deposit ratios before and after the ECB sets negative policy rates in mid-2014. They find that:
- NIRP leads to less lending and more risk taking by high-deposit banks, as compared to low-deposit banks, in the market for syndicated loans;
- As a result, negative interest rates are less accommodative, and could pose a risk to financial stability.
Life Below Zero: Bank Lending Under Negative Policy Rates
Authors: Florian Heider, Farzad Saidi, Glenn Schepens
From: ECB, Stockholm School of Economics
NIRP DOES increase credit supply
Bottero and al. examine the effect of NIRP to the supply of bank credit in Italy in mid-2014 looking at the portfolio rebalancing channel. They find:
- NIRP works through a portfolio rebalancing channel, inducing banks to rebalance their portfolios from liquid assets to credit;
- NIRP affects banks with more liquid balance-sheets;
- As a result, banks expand credit supply, especially to ex-ante riskier and smaller firms, and cut loan rates, inducing sizable firm-level real effects;
- In contrast to existing literature, they show that banks preserve profitability by raising fees on bank deposits.
Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data
Authors: Margherita Bottero, Camelia Minoiu, José-Luis Peydro, Andrea Polo, Andrea F. Presbitero, Enrico Sette
From: IMF
