Monetary Policy and Bank Equity Values in a Time of Low and Negative Interest Rates

Abstract

Does banks’ exposure to interest rate risk change when interest rates are very low or negative? Using a high-frequency event study methodology and intraday data, we find that the effect of surprise interest rate cuts by the ECB on European bank equity values – an effect that is normally positive – has become negative since interest rates in the euro area reached zero and below. This ‘reversal’ was far more pronounced for banks with a more deposit-intensive funding mix. We argue that these results can be explained by the zero lower bound on interest rates on retail deposits.