December 9, 2021


Only The Finest Women

Negative policy rates: Expansionary effects via portfolio rebalancing

Margherita Bottero, Camelia Minoiu, José-Luis Peydró, Andrea Polo, Andrea Presbitero, Enrico Sette 16 November 2021

Very long imagined as unrealistic, damaging desire fees are a important innovation in financial plan. But, studies of the transmission of unfavorable rates to the real economy as a result of banking companies are scarce and display combined effects (Altavilla et al. 2019, Eggertsson and Summers 2019, Heider et al. 2019, Abildgren and Kuchler 2020), leaving lots of inquiries open up about the efficacy of this instrument in spurring bank credit and supporting financial advancement. 

To contribute to this debate, in a recent paper (Bottero et al. 2021) we hire complete facts on bank-company lending relationships and firms’ work and investment decision choices to research the results of the adoption of negative fascination fee coverage (NIRP) by the ECB and reply two important concerns. Initial, what is the impression of NIRP on credit offer and the authentic economy? Second, do reductions of plan rates in destructive territory vary in their transmission to the economy from standard charge cuts just over the zero decreased bound (ZLB) and from other unconventional financial policies these kinds of as quantitative easing (QE)?

The portfolio rebalancing channel of NIRP 

Our evaluation starts from the observation that the ECB’s announcement of NIRP in June 2014 ‒ through a reduce of the deposit facility fee (the fee at which credit history institutions’ excess reserves at central financial institutions are remunerated DF) to -.10% ‒ shifted down and flattened the yield curve (Figure 1, panel a). By breaking by way of the ZLB and leaving undefined the level of the ‘effective’ decrease bound, the ECB signalled to market contributors that the plan place for more cuts was not exhausted and that fascination premiums would remain particularly lower for extensive. In change, market members revised their anticipations, pushing down time period premia and decreasing yields throughout the maturity spectrum. Some shorter-expression yields became damaging quickly. Dealing with the prospect of persistently minimal profitability on extended-phrase securities holdings, coupled with a ‘direct tax’ on excessive reserves, credit rating institutions had been incentivised to reshuffle their portfolio toward increased-yielding belongings (Schnabel 2020). Whilst a flattening of the produce curve is in basic principle associated with a repositioning toward medium- to brief-expression belongings within just the securities portfolio (holding credit rating hazard set), it has various implications if a person considers the entire portfolio and the probability to move up the credit score-chance ladder. Certainly, in an effort to maintain profitability, banking institutions may perhaps opt to swap out of extensive-term securities for the reason that they are too minimal-yield and devote in very long-expression, greater-generate loans. (This may be especially genuine in the scenario of NIRP, when the financial policy steps diminished firms’ debt servicing expenses and boosted demand from customers). In financial loans, banking institutions could even further rebalance towards ex-ante riskier debtors to maximise desire margins. 

Figure 1 Forward curves all over diverse financial policy announcements

a) Negative fascination fee coverage – deposit facility rate minimize down below zero (June 2014)  

b) Announcement of QE programme (January 2015)

c) Conventional deposit facility rate slice earlier mentioned zero (July 2012) 

Notes: The charts plot the generate curves before and just after the ECB introduction of damaging coverage prices in June 2014 (panel a), the ECB announcement of QE (Asset Buy Programme, App) in January 2015 (panel b), and the ECB deposit facility amount slice of July 2012 (panel c). 
Supply: Thomson Reuters Eikon. 

Hence, NIRP led banks to engage in portfolio rebalancing – that is, to swap lower-produce assets (this sort of as extra reserves or low-danger prolonged-phrase securities) for high-generate kinds (such as company financial loans and long-term risky bonds). 

According to this logic, NIRP can supply monetary stimulus by means of a related transmission channel as alternative financial policy resources these as QE, which can also produce massive expectations shocks, flatten the produce curve (Figure 1, panel b) and motivate economic institutions to spend in riskier belongings (Haldane et al. 2016, Krishnamurty and Vissing-Jorgensen, 2011). By distinction, amount cuts just previously mentioned the ZLB may well fall short to make equally powerful portfolio rebalancing incentives. By acting mostly on the small end of the time period framework, these cuts indicate some repositioning absent from short-time period property in the direction of more time-expression kinds, which includes financial loans (Determine 1, panel c). As opposed to a regular minimize, a flattening of the curve implies, for a comparable lower in the brief conclusion of the curve, a stronger decrease in the prolonged end (panel a, NIRP and panel b, QE). This rotation not only incentivises banks to move absent from brief- to prolonged-time period assets owing to the lower in quick-term generate but, as these have fallen much more strongly than in the circumstance of a common slash, also favours a repositioning from safer to riskier property, implying stronger results on loan supply.   

An significant more mechanism by which NIRP can influence banks’ lending conclusions is the so-referred to as retail deposit channel, which is premised on the observation that financial institutions are unlikely to fully pass adverse fees to retail deposits, specifically those people held by homes. This compresses banks’ intermediation margins and erodes banks’ funds, limiting their capability to intermediate credit (Eggertson et al. 2019, Haider et al. 2019).1 

The expansionary result of NIRP 

We empirically examine and quantify the expansionary effect of NIRP through the rebalancing channel outlined higher than. We use supervisory personal loan-stage information for the Italian banking process that are double matched with bank and agency traits. These granular knowledge make it possible for us to command for time-various unobserved heterogeneity throughout companies and for this reason to mitigate probable worries that our results do the job through the influence of NIRP on firms’ credit demand from customers. We evaluate the diploma to which financial institutions are influenced by NIRP by exploiting cross-sectional variation in their ex-ante full liquid belongings (which comprise excess reserves and other quick-time period things exposed to NIRP, such as interbank property) and in web interbank position (outlined as interbank assets minus interbank liabilities) – both scaled by complete financial institution belongings. We argue that the a lot more financial institutions had been impacted by the flattening of the generate-curve, the a lot more we need to notice them expanding, all else equivalent, bank loan source to riskier financial loans. 

Our primary effects are as follows. 1st, we discover that following the introduction of NIRP, much more exposed banks – as a result of greater ex-ante in general liquidity or web interbank placement – clearly show a relatively higher increase in the provide of company loans. This effect is current as early as a person thirty day period right after the implementation of the plan, persists for at minimum 6 months, and is affiliated with a major reduction in loan rates. 

2nd, the enlargement of credit history by much more exposed financial institutions is concentrated among the minimal-cash banks, which rebalance their assets by escalating the fraction of financial loans to smaller sized and ex ante riskier firms. The fact that reduced funds banking companies are driving the impact squares with the truth that these establishments are most likely a lot more involved about preserving their profitability. Importantly, over the interval analysed the enlargement of credit score is not affiliated with greater delinquencies, suggesting that NIRP stimulates credit score to much more fiscally constrained, but viable companies.

3rd, the improve in credit history supply by a lot more liquid banking companies is affiliated with sizeable company-amount serious consequences. In distinct, receiver firms exhibit bigger financial investment and wage charges as opposed to other corporations. 

Lender-amount knowledge for the euro space demonstrate that the portfolio rebalancing channel documented for Italy retains in other jurisdictions as very well. Moreover, our analysis finds no proof of a contractionary retail deposit channel. This outcome could be due to the reality that, when compared to other euro place nations, Italy experienced greater retail deposit rates at the introduction of NIRP and as a result a lot more home for their downward adjustment. 

NIRP: Expansionary however various?

A essential question is regardless of whether NIRP differs in its transmission to the economic climate from standard rate cuts and how it compares to choice unconventional steps.

Our information clearly show that NIRP functions far more strongly than price cuts just above the ZLB. The two rate cuts by the ECB prior to NIRP – the 2012 deposit facility fee minimize and the 2013 principal refinancing procedure charge cut – only impacted the short close of the generate curve and therefore did not make as sturdy incentives to rebalance portfolios absent from securities holdings to corporate loans. By distinction, the March 2016 slash, which pushed the deposit facility level further into adverse territory, was equipped to at the time all over again shift down and flatten the generate curve, making rebalancing towards company loans. 

How does NIRP assess with balance sheet policies this sort of as QE? Our conjecture is that procedures that are in a position to shift down and flatten the generate curve should really have a identical influence to that of NIRP. We deliver evidence regular with this conjecture. The ECB’s January 2015 announcement of the introduction of the Asset Order Programme is linked with an enlargement of credit history source by extra liquid banking companies following the plan, consistent with the flattening of the generate curve. Supplemental proof supporting this hypothesis appears at info from two QE functions in the US involving large-scale asset purchases by the Federal Reserve in November 2008 and August 2010, respectively. The US info exhibit that far more liquid financial institutions have fairly increased personal loan growth charges and are significantly less very likely to tighten commercial lending benchmarks right after these QE episodes that shifted down and flattened the produce curve. While suggestive, we consider that these benefits point out a promising place of research on how financial policies affect bank lending and the economic climate through shifts in the generate curve. 

Portfolio rebalancing and monetary coverage transmission

The debate about the effects and the desirability of NIRP is very related in the current setting of small-for-very long desire rates, and even additional so soon after the Covid-19 pandemic (Lilley and Rogoff 2020). Our investigation documents an expansionary outcome of NIRP on bank credit provide and the real financial system through a portfolio-rebalancing channel. This mechanism is a additional normal channel of monetary coverage transmission by which shifts in the produce curve – no matter of the monetary plan instrument employed to attain them – have an affect on banking companies depending on their holdings of liquid belongings. In plan conversations, the expansionary consequences documented in our paper should really thoroughly be well balanced towards potential economic steadiness threats stemming from ultra-lower premiums over very long intervals of time. Probable pitfalls include things like ‘excessive’ lender hazard-taking in securities and lending portfolios, and constrained lending potential due to profitability and cash pressures (Brunnermeier and Koby 2018). 

Authors’ notice: The views expressed herein are those people of the writer and really should not be attributed to the Financial institution of Italy, Federal Reserve Method, the Worldwide Financial Fund, their respective management or Executive Boards.


Altavilla, C, L Burlon, M Giannetti and S Holton, (2019), “The impact of adverse curiosity fees on banking companies and corporations,”, 8 November. 

Altavilla, C, L Burlon, M Giannetti and S Holton, (2021), “Is there a Zero Reduce Bound? The Effects of Adverse Policy Fees on Banking companies and Firms,” Journal of Monetary Economics, forthcoming. 

Bottero, M, C Minoiu, J L Peydró, A Polo, A Presbitero and E Sette, (2021), “Expansionary nonetheless different: credit rating supply and real effects of damaging fascination charge coverage,” Journal of Monetary Economics, forthcoming

Abildgren, K and A Kuchle, (2020), “Firms going through unfavorable deposit premiums spend much more and develop more jobs”,, 1 December. 

Brunnermeier, M K and Y Koby, (2018), “The reversal fascination charge,” NBER Doing work Paper No. 25406. 

Eggertson, G and L H Summers, (2019), “Negative fascination price plan and the lender lending channel,”, 24 January. 

Heider, F, F Saidi and G Schepens (2019), “Bank lending underneath damaging plan fees,”, 17 December 17. 

Lilley, A and K Rogoff (2020), “Negative desire charge policy in the submit Covid-19 environment,”, 17 April. 

Haldane, A, M Roberts-Sklar, C Young and T Wieladek (2016), “QE: The story so much,” Lender of England Doing work Paper No. 624. 

Krishnamurthy, A and A Vissing-Jorgensen, (2011), “The consequences of quantitative easing on interest fees: channels and implications for policy”, NBER Performing Paper No. 17555.


1 At the exact same time, Altavilla et al. (2021) demonstrate that reliable banks can pass detrimental charges on to their corporate depositors with out going through a contraction in funding, and that they present a lot more credit score, de facto limiting the functioning of the retail deposit channel to deposits held by homes and/or to weaker financial institutions.