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How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold


Basten, Christoph; Mariathasan, Mike (2018). How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold. CESifo Working Papers 6901, University of Zurich.

Abstract

We analyze the effect of negative monetary policy rates on banks, using detailed supervisory information from Switzerland. For identification, we compare changes in the behavior of banks that had different fractions of their central bank reserves exempt from negative rates. More affected banks reduce costly reserves and bond financing while maintaining non-negative deposit rates and larger deposit ratios. Higher fee and interest income successfully compensates for squeezed liability margins, but credit and interest rate risk increase. Portfolio rebalancing implies relatively more lending, also compared to an earlier rate cut within positive territory, and risk-taking reduces regulatory capital cushions and liquidity.

Abstract

We analyze the effect of negative monetary policy rates on banks, using detailed supervisory information from Switzerland. For identification, we compare changes in the behavior of banks that had different fractions of their central bank reserves exempt from negative rates. More affected banks reduce costly reserves and bond financing while maintaining non-negative deposit rates and larger deposit ratios. Higher fee and interest income successfully compensates for squeezed liability margins, but credit and interest rate risk increase. Portfolio rebalancing implies relatively more lending, also compared to an earlier rate cut within positive territory, and risk-taking reduces regulatory capital cushions and liquidity.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 March 2018
Deposited On:02 Oct 2018 13:16
Last Modified:02 Oct 2018 13:28
Series Name:CESifo Working Papers
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Official URL:https://www.cesifo-group.de/de/ifoHome/publications/docbase/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2018/wp-cesifo-2018-02/12012018006901.html
Other Identification Number:merlin-id:16151

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