UNCONVENTIONAL MONETARY POLICY, COMPETITION AND FINANCIAL STABILITY. EVIDENCE FROM THE EUROZONE BANKS
DOI:
https://doi.org/10.25115/eae.v38i1.2970Keywords:
Bank competition, financial stability, lending and deposit supply, negative interest rates, quantitative easing.Abstract
This article analyses the effects of the ECB’s negative interest rates (or unconventional) policy on the degree of banking competition, lending and deposit supply, and financial stability. Using a dataset comprising 191 Eurozone banks for the 2002Q1-2016Q4 period, our results suggest that negative interest rates (i) increase banks’ lending and deposit supply, (ii) reduce banking competition, and (iii) weaken financial stability. This phenomenon is economically more significant for periphery country banks than for core country banks.
Downloads
References
AIYAR, S.; BERGTHALER, W.; GARRIDO, J.; ILYINA, A.; JOBST, A.; KANG, K.; … MORETTI, M. (2015). A Strategy for Resolving Europe’s Problem Loans. https://doi.org/http://dx.doi.org/10.5089/9781513591278.006
ALLEN, F.and GALE, D. (2004). "Competition and Financial Stability". Journal of Money, Credit and Banking, 36(3), pp. 453–480. Retrieved from http://www.jstor.org/stable/3838946
ALTAVILLA, C.; BURLON, L.; GIANNETTI, M.and HOLTON, S. (2019). Is there a zero lower bound? The effects of negative policy rates on banks and firms (No. 2289 / June 2019). Retrieved from https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2289~1a3c04db25.en.pdf
ALTAVILLA, C.; GIACOMINI, R.and RAGUSA, G. (2017a). "Anchoring the yield curve using survey expectations". Journal of Applied Econometrics, 32(6), pp. 1055–1068. https://doi.org/10.1002/jae.2588
ALTAVILLA, C.; PAGANO, M.and SIMONELLI, S. (2017b). "Bank Exposures and Sovereign Stress Transmission*". Review of Finance, 21(6), pp. 2103–2139. https://doi.org/10.1093/rof/rfx038
ANDREEVA, D.and GARCIA-POSADA, M. (2019). The Impact of the ECB’s Targeted Long-Term Refinancing Operations on Banks’ Lending Policies: The Role of Competition. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3330525
ARPING, S. (2019). "Competition and risk taking in banking: The charter value hypothesis revisited". Journal of Banking & Finance, 107, 105609. https://doi.org/10.1016/J.JBANKFIN.2019.105609
ARTETA TASKIN, C.and TEMEL, M. A. K. M. S. (2016). Negative Interest Rate Policies: Sources and Implications. In Policy Research Working Papers. https://doi.org/doi:10.1596/1813-9450-7791
BdE. (2017). Report on the financial and banking crisis in Spain, 2008-2014. Retrieved from https://www.bde.es/bde/en/secciones/informes/Otras_publicacio/informe-sobre-la/
BERGER, A. N.; BLACK, L. K.; BOUWMAN, C. H. S.and DLUGOSZ, J. (2017). "Bank loan supply responses to Federal Reserve emergency liquidity facilities". Journal of Financial Intermediation, 32, pp. 1–15. https://doi.org/10.1016/J.JFI.2017.02.002
BERGER, A. N.and DEYOUNG, R. (1997). "Problem loans and cost efficiency in commercial banks". Journal of Banking & Finance, 21(6), pp. 849–870. https://doi.org/https://doi.org/10.1016/S0378-4266(97)00003-4
BOUWMAN, C. H. S.and MALMENDIER, U. (2015). "Does a Bank’s History Affect Its Risk-Taking?"The American Economic Review, 105(5), pp. 321–325. Retrieved from http://www.jstor.org/stable/43821901
BOWMAN, D.; CAI, F.; DAVIES, S.and KAMIN, S. (2015). "Quantitative easing and bank lending: Evidence from Japan". Journal of International Money and Finance, 57, pp. 15–30. https://doi.org/https://doi.org/10.1016/j.jimonfin.2015.05.002
BOYD, J. H.and DE NICOLÒ, G. (2005). "The Theory of Bank Risk Taking and Competition Revisited". The Journal of Finance, 60(3), pp. 1329–1343. https://doi.org/10.1111/j.1540-6261.2005.00763.x
BRUNNERMEIER, M. K.andKOBBY, Y. (2019). The Reversal Interest Rate. Retrieved from https://scholar.princeton.edu/markus/publications/reversal-interest-rate-effective-lower-bound-monetary-policy
BRUNNERMEIER, M. K.andSANNIKOV, Y. (2016). The I Theory of Money (No. 22533). https://doi.org/10.3386/w22533
BUSCH, R.and MEMMEL, C. (2017). "Banks’ net interest margin and the level of interest rates". Credit and Capital Markets – Kredit Und Kapital, 50(3), pp. 363–392. https://doi.org/https://doi.org/10.3790/ccm.50.3.363
CARBÓ-VALVERDE, S.; MANSILLA-FERNÁNDEZ, J. M.and RODRÍGUEZ-FERNÁNDEZ, F. (2017a). "Monetary policy, implicit interest rate, and relative net trade credit". Revista de Economia Aplicada, XXV(73), pp 21-54.
CARBÓ-VALVERDE, S.; MANSILLA-FERNÁNDEZ, J. M.and RODRÍGUEZ-FERNÁNDEZ, F. (2017b). "The effects of bank market power in short-term and long-term firm credit availability and investment". Revista Espanola de Financiacion y Contabilidad, 46(1), pp. 1-27. https://doi.org/10.1080/02102412.2016.1242239
CARBÓ, S.; RODRÍGUEZ, F.and UDELL, G. F. (2009). "Bank Market Power and SME Financing Constraints". Review of Finance, 13(2), pp. 309–340. https://doi.org/10.1093/rof/rfp003
CHAKRABORTY, I.; GOLDSTEIN, I.and MACKINLAY, A. (2019). "Monetary Stimulus and Bank Lending". Journal of Financial Economics, Forthcoming.
CHAUDRON, R. F. D. D. (2018). "Bank’s interest rate risk and profitability in a prolonged environment of low interest rates". Journal of Banking & Finance, 89, pp. 94–104. https://doi.org/https://doi.org/10.1016/j.jbankfin.2018.01.007
CHIESA, G.and MANSILLA-FERNÁNDEZ, J. M. (2018). "Disentangling the transmission channel NPLs-cost of capital-lending supply". Applied Economics Letters, pp. 1–6. https://doi.org/10.1080/13504851.2018.1558335
CLAESSENS, S.; COLEMAN, N.and DONNELLY, M. (2018). "“Low-For-Long” interest rates and banks’ interest margins and profitability: Cross-country evidence". Journal of Financial Intermediation, 35, pp. 1–16. https://doi.org/https://doi.org/10.1016/j.jfi.2017.05.004
COCCORESE, P. (2004). "Banking competition and macroeconomic conditions: {a} disaggregate analysis". Journal of International Financial Markets, Institutions and Money, 14(3), pp. 203–219. https://doi.org/http://dx.doi.org/10.1016/j.intfin.2003.07.001
COCCORESE, P. (2008). "Bank competition and regional differences". Economics Letters, 101(1), pp. 13–16. https://doi.org/http://dx.doi.org/10.1016/j.econlet.2008.03.019
COCCORESE, P. (2009). "Market power in local banking monopolies". Journal of Banking & Finance, 33(7), pp. 1196–1210. https://doi.org/http://dx.doi.org/10.1016/j.jbankfin.2008.12.013
CRUZ-GARCÍA, P.; FERNÁNDEZ DE GUEVARA, J.and MAUDOS, J. (2017). "The evolution of market power in European banking". Finance Research Letters, 23, pp. 257–262. https://doi.org/https://doi.org/10.1016/j.frl.2017.06.012
CRUZ-GARCÍA, P.; FERNÁNDEZ DE GUEVARA, J.and MAUDOS, J. (2018). "Concentración y competencia bancarias en España: El impacto de la crisis y de la reestructuración". Revista de Estabilidad Financiera - Financial Stability Review, 5(34), pp. 57–76. Retrieved from https://www.bde.es/f/webbde/GAP/Secciones/Publicaciones/InformesBoletinesRevistas/RevistaEstabilidadFinanciera/18/MAYO/Articulo_Cruz_Guevara_Maudos-en.pdf
CÚRDIA, V.and WOODFORD, M. (2011). "The central-bank balance sheet as an instrument of monetarypolicy". Journal of Monetary Economics, 58(1), pp. 54–79. https://doi.org/https://doi.org/10.1016/j.jmoneco.2010.09.011
DEGRYSE, H.and ONGENA, S. (2008). "{CHAPTER} 15 - Competition and Regulation in the Banking Sector: A Review of the Empirical Evidence on the Sources of Bank Rents". In A. V Thakor & A. W. A. Boot (Eds.), Handbook of Financial Intermediation and Banking, pp. 483–554. https://doi.org/http://dx.doi.org/10.1016/B978-044451558-2.50023-4
DEL NEGRO, M.; EGGERTSSON, G.; FERRERO, A.and KIYOTAKI, N. (2017). "The Great Escape? A Quantitative Evaluation of the Fed’s Liquidity Facilities". American Economic Review, 107(3), pp. 824–857. https://doi.org/10.1257/aer.20121660
DRECHSLER, I.; SAVOV, A.and SCHNABL, P. (2017). "The Deposits Channel of Monetary Policy*". The Quarterly Journal of Economics, 132(4), pp. 1819–1876. https://doi.org/10.1093/qje/qjx019
EGGERTSSON, G. B., and WOODFORD, M. (2003). "The Zero Bound on Interest Rates and Optimal Monetary Policy". Brookings Papers on Economic Activity, 2003(1), pp. 139–211. Retrieved from http://www.jstor.org/stable/1209148
FERNÁNDEZ DE GUEVARA, J.; MAUDOS, J. and PÉREZ, F. (2005). "Market Power in European Banking Sectors". Journal of Financial Services Research, 27(2), pp. 109–137. https://doi.org/10.1007/s10693-005-6665-z
GOETZ, M.R. (2018). "Competition and bank stability". Journal of Financial Intermediation, 35, Part A, pp. 57-69. https://doi.org/10.1016/j.jfi.2017.06.001
GHOSH, A. (2017). "Sector-specific analysis of non-performing loans in the US banking system and their macroeconomic impact". Journal of Economics and Business, 93, pp. 29–45. https://doi.org/10.1016/J.JECONBUS.2017.06.002
GRIGOLI, F.; MANSILLA, M.and SALDÍAS, M. (2018). "Macro-financial linkages and heterogeneous non-performing loans projections: An application to Ecuador". Journal of Banking & Finance, 97, pp. 130–141. https://doi.org/10.1016/J.JBANKFIN.2018.09.023
HEIDER, F.; SAIDI, F.and SCHEPENS, G. (2019). "Life below Zero: Bank Lending under Negative Policy Rates*". The Review of Financial Studies. https://doi.org/10.1093/rfs/hhz016
IJTSMA, P.; SPIERDIJK, L.and SHAFFER, S. (2017). "The concentration–stability controversy in banking: New evidence from the EU-25". Journal of Financial Stability, 33(December), pp. 273–284. https://doi.org/http://dx.doi.org/10.1016/j.jfs.2017.06.003
JIMÉNEZ, G.; LOPEZ, J. A.and SAURINA, J. (2013). "How does competition affect bank risk-taking?"Journal of Financial Stability, 9(2), pp. 185–195. https://doi.org/10.1016/J.JFS.2013.02.004
LAEVEN, L.and LEVINE, R. (2009). "Bank governance, regulation and risk taking". Journal of Financial Economics, 93(2), pp. 259–275. https://doi.org/http://dx.doi.org/10.1016/j.jfineco.2008.09.003
LIU, H.; MOLYNEUX, P.and WILSON, J. O. S. (2013). "Competition and stability in European banking: A regional analysis*". The Manchester School, 81(2), pp. 176–201. https://doi.org/10.1111/j.1467-9957.2011.02285.x
LOPEZ, J. A.; ROSE, A. K.and SPIEGEL, M. (2018). Why Have Negative Nominal Interest Rates Had Such a Small Effect on Bank Performance? Cross Country Evidence (No. 13010).
MARTINEZ-MIERA, D.and REPULLO, R. (2010). "Does Competition Reduce the Risk of Bank Failure?"Review of Financial Studies, 23(10), pp. 3638–3664. https://doi.org/10.1093/rfs/hhq057
MOLYNEUX, P.; REGHEZZA, A.; THORNTON, J.and XIE, R. (2019a). "Did Negative Interest Rates Improve Bank Lending?"Journal of Financial Services Research. https://doi.org/10.1007/s10693-019-00322-8
MOLYNEUX, P.; REGHEZZA, A.and XIE, R. (2019b). "Bank margins and profits in a world of negative rates". Journal of Banking & Finance, 107, 105613. https://doi.org/https://doi.org/10.1016/j.jbankfin.2019.105613
OLIVER, A. M.; FUMÁS, V. S.and SAURINA, J. (2006). "Risk premium and market power in credit markets". Economics Letters, 93(3), pp. 450–456. https://doi.org/10.1016/J.ECONLET.2006.06.021
ONGENA, S. R. G.and POPOV, A. A. (2009). Interbank Market Integration, Bank Competition, and Loan Rates. Retrieved from http://dx.doi.org/10.2139/ssrn.1339856
RODNYANSKY, A.and DARMOUNI, O. M. (2017). "The Effects of Quantitative Easing on Bank Lending Behavior". The Review of Financial Studies, 30(11), pp. 3858–3887. https://doi.org/10.1093/rfs/hhx063
SCHAECK, K.; CIHAK, M., MAECHLER, A.and STOLZ, S. (2012). "Who Disciplines Bank Managers?"Review of Finance, 16(1), pp. 197–243. https://doi.org/10.1093/rof/rfr010
VANHOOSE, D. (2017). The Industrial Economics of Banking. In VanHoose, D.The Industrial Organization of Banking: Bank Behavior, Market Structure, and Regulation (pp. 47–88). https://doi.org/10.1007/978-3-662-54326-9_3
WALLACE, N. (1981). "A Modigliani-Miller Theorem for Open-Market Operations". The American Economic Review, 71(3), pp. 267–274. Retrieved from http://www.jstor.org/stable/1802777
ZHANG, D.; CAI, J.; DICKINSON, D. G.and KUTAN, A. M. (2016). "Non-performing loans, moral hazard and regulation of the Chinese commercial banking system". Journal of Banking & Finance, 63, pp. 48–60. https://doi.org/10.1016/J.JBANKFIN.2015.11.010
