1,721,000 research outputs found
Fly You Fools! The Unintended Consequences of the Negative Interest Rate Policy
No full textThe aim of this doctoral thesis is to study the recent use of negative interest rates focusing on
the impact that the negative interest rate policy (NIRP thereafter) has on bank profitability,
lending and sovereign bond holding. After providing a definition and contextualisation of
NIRP, this thesis addresses three different research questions.
The first research question will focus on the impact of NIRP on bank profitability and
consequently on financial stability. A cut in interest rates into negative territory may increase
bank profitability if there is significant loan growth and margins are unaffected, or/and if banks
boost fee and commission income on the back of greater lending. However, if banks are unable
to reduce deposit rates to the same extent as loan rates then margins will be compressed, and if
there is limited loan growth and/or cross-selling of fee and commission services then profits
will likely fall. If the latter is the case, the decline in profits can erode bank capital bases and
further limit credit growth thus stifling NIRP monetary transmission effects. The first paper
addresses this serious concern. It examines whether or not, after the introduction of NIRP,
banks margins and profits have been negatively affected. Furthermore, it investigates if
negative rates have promoted a change in bank business model. The contraction of net interest
margin could have affected banks business model promoting a switch from interest-based to
fee-based activities.
The second paper is strongly linked to the first. If NIRP decreases banks profitability eroding
capital base, banks may be reluctant to lend limiting monetary policy potential and expected
outcome. The second research question addresses this point. It tries to capture whether or not
after the implementation of NIRP banks increased or decreased lending in comparison with a
control group who has not been affected by negative rates. The effect of NIRP on bank lending
may further be aggravated in the European context where banks have been facing slow
economic recovery, historically high levels of non-performing loans, and a post GFC and
European sovereign debt crisis deleveraging phase. In this economic environment, banks could
have employed the excess liquidity provided by central banks unconventional monetary policy
measures to buy corporate and government debt securities rather than lending. This behaviour
links to the third research question.
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The third research question investigates banks sovereign bond holding during the low and
negative interest rate environment that has characterised the period after the 2007/2008
Financial Crisis and European Sovereign Debt Crisis. In such a situation, banks may prefer to
hold sovereign bonds rather than lending for the following reasons. First, prudential regulation
favours sovereign debt over loans as it assigns neither capital charges (zero-risk-weights) nor
portfolio concentration limits. Banks with low capital ratio may increase return on equity by
shifting from low to high yield sovereigns without altering regulatory capital requirements.
Second, in a period with slow economic recovery, historically high level of non-performing
loans, increasing loan loss provisions and low interest rates, sovereign debt can act as a
substitute for credit affecting banks’ lending decision. The same reasons, as previously
described, can negatively affect bank profitability suggesting that banks may have an incentive
to purchase high yield sovereign debt securities to improve profitability conditions (carry trade hypothesis
Non-significant in life but significant in death: Spillover effects to euro area banks from the SVB fallout
Full text linkDid Silicon Valley Bank (SVB) fallout spillover to the euro area banking sector? We find that euro area banks’ cumulative abnormal returns declined by about 10% on average after the collapse of SVB. Surprisingly, we also find that investors did not react to euro area banks sharing similar vulnerabilities as SVB, such as lower liquidity and less stable funding sources. Instead, they were more concerned about the possible negative repercussions on banks’ balance sheets coming from the pace of the current monetary policy tightening
Do Banks Practice What They Preach? Brown Lending and Environmental Disclosure in the Euro Area
No full textWe examine whether the level of environmental disclosure in fnancial reports equates with less brown lending by banks. We use granular credit register data and detailed information on the frm-level intensity of greenhouse gas emissions and fnd a negative relationship. This relationship is contingent on the tone of the fnancial report: a negative tone, refecting greater awareness of environmental risks, leads to less brown lending; a positive tone, indicating lower awareness, leads to more brown lending. These fndings highlight the importance of the awareness of environmental risks as critical, urgent, and pressing threats to creating environmentally responsible lenders
Euro area bank profitability: where can consolidation help?
No full textLow aggregate bank profitability in the euro area, which weakens the resilience of the euro area banking sector, is partly explained by the persistent underperformance of a sub-set of banks. These banks all stand out in terms of elevated cost-to-income ratios. But there also appear to be three distinct groups: (i) banks struggling with legacy asset problems; (ii) banks with weak income-generation capacity; and (iii) banks suffering from a combination of cost and revenue-side problems. The common cost inefficiency problem seems most pronounced for the largest and smallest banks. Three strategies, all of which should reduce overcapacity, could address the root causes, while avoiding increasing market power or the systemic footprint of institutions which are already systemically important. For some banks, the focus should be on targeting continued high stocks of NPLs. But in systems with many weak-performing small banks, consolidation within their domestic system could improve performance. Finally, a combination of bank-level restructuring and cross-border M&A activity could help reduce the costs and diversify the revenues of large banks that are performing poorly. JEL Classification: Add JEL codes separated by semi-colon
Do banks practice what they preach? Brown lending and environmental disclosure in the euro area
No full textThis study examines whether the level of environmental disclosure in banks’ financial reports matches less brown lending portfolios. Using granular credit register data and detailed information on firm-level greenhouse gas emission intensities, we find a negative relationship between environmental disclosure and brown lending. However, this effect is contingent on the tone of the financial report. Banks that express a negative tone, reflecting genuine concern and awareness of environmental risks, tend to lend less to more polluting firms. Conversely, banks that express a positive tone, indicating lower concern and awareness of environmental risks, tend to lend more to polluting firms. These findings highlight the importance of increasing awareness of environmental risks, so that banks perceive them as a critical and urgent pressing threat, leading to a genuine commitment to act as environmentally responsible lenders
Do banks practice what they preach? Brown lending and environmental disclosure in the euro area
No full textThis study examines whether the level of environmental disclosure in banks’ financial reports matches less brown lending portfolios. Using granular credit register data and detailed information on firm-level greenhouse gas emission intensities, we find a negative relationship between environmental disclosure and brown lending. However, this effect is contingent on the tone of the financial report. Banks that express a negative tone, reflecting genuine concern and awareness of
environmental risks, tend to lend less to more polluting firms. Conversely, banks that express a positive tone, indicating lower concern and awareness of environmental risks, tend to lend more to polluting firms. These findings highlight the importance of increasing awareness of environmental risks, so that banks perceive them as a critical and urgent pressing threat, leading to a genuine commitment to act as environmentally responsible lenders
Bank Margins and Profits in a World of Negative Rates
Full text linkBy investigating the influence of negative interest rate policy (NIRP) on bank margins and profitability, this paper identifies country- and bank- specific characteristics that amplify or weaken the effect of NIRP on bank performance. Using a dataset comprising 7,359 banks from 33 OECD member countries over 2012-2016 and a difference-in-differences methodology, we find that bank margins and profits fell in NIRP-adopter countries compared to countries that did not adopt the policy. Moreover, this adverse NIRP effect depends on bank specific-characteristics such as size, funding structure, business models, assets repricing and product – line specialization. The effectiveness of the pass-through mechanism of NIRP can also be affected by the characteristics of a country's banking system, namely, the level of competition and the prevalence of fixed/floating lending rates
Do banks practice what they preach? Brown lending and environmental disclosure in the euro area
No full textThis study examines whether the level of environmental disclosure in banks’ financial reports matches less brown lending portfolios. Using granular credit register data and detailed information on firm-level greenhouse gas emission intensities, we find a negative relationship between environmental disclosure and brown lending. However, this effect is contingent on the tone of the financial report. Banks that express a negative tone, reflecting genuine concern and awareness of environmental risks, tend to lend less to more polluting firms. Conversely, banks that express a positive tone, indicating lower concern and awareness of environmental risks, tend to lend more to polluting firms. These findings highlight the importance of increasing awareness of environmental risks, so that banks perceive them as a critical and urgent pressing threat, leading to a genuine commitment to act as environmentally responsible lenders
A new measure for gauging the riskiness of European banks' sovereign bond portfolios
Full text linkFor a sample of 51 European banks, during 2010-2016, we construct a novel measure (SovRisk) which captures the riskiness of sovereign bond portfolios. We demonstrate the ability of this measure to explain the phases of the European sovereign debt crisis while accounting for the substantial differences between distressed and non-distressed countries. We contend that SovRisk can be used as a complement to bank Credit Default Swap (CDS) spreads, or a substitute in the absence of traded CDS, for measuring banks’ sovereign risk
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