Glenn Schepens

Life Below Zero: Bank Lending Under Negative Policy Rates

We show that negative policy rates affect the supply of bank credit in a novel way. Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding. Our results suggest that negative rates are less accommodative, and could pose a risk to financial stability, if lending is done by high-deposit banks.

The Impact of Bank Shocks on Firm-Level Outcomes and Bank Risk-Taking

Current empirical methods to identify and assess the impact of bank shocks rely strictly on firms borrowing from multiple banks and ignore the many firms borrowing from only one bank. Yet, such single-relationship firms may be the most prone and sensitive to bank-loan supply shocks. Therefore, we develop time-varying cross-sectional measures of bank-loan supply that include these single-relationship firms. Using bank-firm matched credit data from Belgium for the period 2002-2012, we examine their information content and impact on firm outcomes and bank risk-taking. Our estimated supply shocks correlate significantly with interbank liabilities growth and bank lending standards. Firms borrowing from banks with negative supply shocks exhibit lower growth, investment and sales. Positive supply shocks are associated with bank risk-taking behaviour at the extensive margin. Importantly, in order to capture these effects in our sample, it is crucial to include the single-relationship firms in the identification of the supply shocks.

Funding shocks and banks' credit reallocation

This paper provides evidence on the strategic lending decisions made by banks facing a negative funding shock. Using bank-firm level credit data, we show that banks reallocate credit within their domestic loan portfolio in at least three different ways. First, banks reallocate to sectors where they have high sector presence. Second, they also reallocate to sectors in which they are heavily specialized. Third, they reallocate credit towards low-risk firms. These reallocation effects are economically large. A standard deviation improvement in sector presence, sector specialization or firm risk reduces the transmission of the funding shock to credit supply by 20, 13 and 10%, respectively. We also provide insight in the timing of these reallocation decisions. Reallocation to sectors in which a bank has a high sector presence is almost instantaneous, while sector specialization starts playing a role four to five months after the shock.