Associate Dr. Pietro Grandi has coauthored an article published in the Journal of International Money and Finance that studies how banks reacted to the European Central Bank’s introduction of negative rates.
Using loan level data for France, the authors find that banks most reliant on deposits react to negative monetary policy rates by increasing lending volumes, taking on additional risk, and increasing fee income relative to other banks. Negative rates can encourage the banks that are most reliant on deposits to engage in riskier activities in order to shield profitability. The compositions of banks’ deposits also plays a key role in the transmission of monetary policy rates below zero.
The full article, “Banks, Deposit Rigidity and Negative Rates,” is available below (behind a paywall after May 18, 2023).View Article