The channels of banks’ response to negative interest rates

Faced with a potential zero lower bound on deposit interest rates, how do banks pass on thefall in net interest income due to negative interest rates? This paper aims to investigate thedifferent channels of banks’ responses to negative interest rates using a detailed breakdownof the profit and loss account of 3637 banks in 59 countries from 2011 to 2018. We find thatthe decrease in interest income due to negative interest rates is mitigated by an increase innon-interest income, but only partially. We find that banks respond to that shock by reducingthe interest paid on non-customer deposit liabilities and their personnel expenses. We alsoshow that banks’ responses are not instantaneous and that they adjust their response asnegative interest rates persist over time such that how long negative interest rates areimplemented matters. Finally, our results suggest that large banks with higher deposits andhigher leverage ratios are the most affected by the implementation of negative interest rates