Exploring the Unexplored: An Assessment of the Implications of Low and Negative Interest Rates for the Banking Sector

Abstract

The aim of this doctoral thesis is to study whether protracted periods of low and negative interest rates have unintended effects on the banking sector. Specifically, by investigating a completely new event in the central banking community: the introduction of the Negative Interest Rate Policy (NIRP), this thesis studies the effect of nominal negative interest rates on bank margins and profits, and lending for a large sample of European banks over 2012-16. Moreover, by employing granular data on the Italian banking sector, this thesis investigates the effect of low interest rates on Italian bank business model over 2007-17. Overall, I find that negative interest rates reduce margins and profits as deposit rates are sticky downward. However, this depends on bank- and country-specific characteristics. If NIRP compresses margins and profits, capital accumulation via retained earnings is limited. Consequently, I also find that NIRP negatively affects lending. Again, this depends on bank- and country-specific characteristics. Finally, I show that banks try to keep up profits in a low and negative interest rate environment by switching from traditional intermediation activity to a more ‘services-oriented’ business model.

Date of Award	23 Feb 2020
Original language	English
Awarding Institution	Bangor University
Supervisor	Jon Williams (Supervisor)