Banks, deposit rigidity and negative rates

Using loan level data for France, we show that the introduction of negative rates by the European Central Bank is associated with an expansion in lending by banks with greater reliance on deposits. The impact is driven by banks with larger shares of rigid deposits, i.e. deposits whose rate becomes inelastic when the policy rate falls below zero, such as short-term and households deposits. Consistent with risk-taking, negative rates appear to elicit reallocation away from safe assets, as banks increase exposure to smaller firms and corporate debt securities, as well as increase fee income. Finally, we document that these findings generalize to banks in the Euro Area. Our results suggest that negative rates encourage banks most reliant on deposits to engage in riskier activities to shield profitability, and that the composition of banks’ deposits plays a key role in the transmission of monetary policy rates below the zero lower bound.