Bank interest rate margins in a negative interest rate environment

Abstract

This paper studies the impact of the negative interest rate policy (NIRP) on euro area banks’ interest rate margins, using bank-individual data for the 2007-2019 period. An important extension to other studies is our breakdown of banks’ interest rate margin into a funding and lending component. Because of banks’ reluctance to reduce the interest rate on household deposits below zero, the funding margin of banks more reliant on deposit funding has declined compared to that of other banks. Our evidence shows that these banks have been unwilling or unable to compensate this by boosting their lending margins. Therefore, negative rates have significantly reduced the overall net interest margin of deposit-dependent banks compared to other banks.