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How Would US Banks Fare in a Negative Interest Rate Environment?

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Abstract

The effectiveness of negative interest rates as a monetary policy tool depends importantly on the response of the banking sector. This paper offers unique new insights for U.S. banks by using supervisory data to examine bank-level expectations regarding the impact of negative rates on profitability through net interest margins. The main results show that the largest U.S. banks differ significantly in how they respond to negative interest rates. The most significant channel of adverse exposure comes from the pass-through of the negative policy rate to interest rates on short-term liquid assets held on the balance sheet. At the same time, on the liability side, banks that rely more heavily on short-term wholesale funding, including financing through the repo market, may benefit through a reduction in funding costs. In the aggregate, these effects likely wash out as liquidity provision is sufficiently well diversified across the banking sector as a whole.

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  • David M. Arseneau, 2017. "How Would US Banks Fare in a Negative Interest Rate Environment?," Finance and Economics Discussion Series 2017-030r1, Board of Governors of the Federal Reserve System (U.S.), revised 31 Jul 2020.
    • Handle: RePEc:fip:fedgfe:2017-30
    DOI: 10.17016/FEDS.2017.030r1
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    Cited by:

    1. Michael W. McCracken & Joseph T. McGillicuddy, 2019. "An empirical investigation of direct and iterated multistep conditional forecasts," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(2), pages 181-204, March.
    2. Florian Heider & Farzad Saidi & Glenn Schepens, 2021. "Banks and Negative Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 201-218, November.
    3. Molyneux, Philip & Reghezza, Alessio & Xie, Ru, 2019. "Bank margins and profits in a world of negative rates," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    4. Loriana Pelizzon & Matteo Sottocornola, 2016. "The Impact of the Monetary Policy Interventions on the Insurance Industry," EIOPA Financial Stability Report - Thematic Articles 8, EIOPA, Risks and Financial Stability Department.
    5. Jia, Pengfei, 2020. "Negative Interest Rates on Central Bank Digital Currency," MPRA Paper 103828, University Library of Munich, Germany.
    6. Junttila, Juha & Nguyen, Vo Cao Sang, 2022. "Impacts of sovereign risk premium on bank profitability: Evidence from euro area," International Review of Financial Analysis, Elsevier, vol. 81(C).

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    More about this item

    Keywords

    Banking conditions; net interest margins; Unconventional monetary policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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