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European Central Bank researchers weighed into the debate over negative interest rates, arguing that driving rates below zero almost five years ago led to higher lending and boosted the economy.
Citing confidential banking data, ECB economists said in a paper that lending to companies and households increased “significantly” among banks that were reliant on retail deposits for funding and held excess cash.
The researchers also said subzero rates worked as an “empowerment” for the central bank’s bond-buying program, the other key pillar of its post-financial crisis policy. That program created excess liquidity which under the negative-rate regime incentivized banks to boost lending, according to Selva Demiralp, Jens Eisenschmidt and Thomas Vlassopoulos.
“Both measures were instrumental in providing additional monetary policy accommodation in a situation in which the euro area faced subdued loan dynamics, low output growth and inflation rates well below those consistent with its mandate,” they said. The study doesn’t necessarily reflect the ECB’s official view.
Negative rates were unleashed by several central banks in the wake of the global financial crisis, but they’ve come under intense criticism from commercial lenders and academics who say they stifle economic momentum by cutting bank profitability.
One paper, co-authored by former U.S. Treasury Secretary Lawrence Summers, said that the policy had actually raised mortgage rates in Sweden, rather than lowering them. That claim was rebutted by the Nordic country’s central bank.
The latest research also comes amid a debate at the ECB over whether it needs to mitigate the impact of subzero rates on bank profitability. One such way would be tiering, or exempting a portion of banks’ reserves from the minus 0.4% deposit rate. ECB President Mario Draghi raised the possibility in March, though his fellow policy makers have shown little enthusiasm and in some cases even opposition.
The ECB economists said they had a slightly different approach to previous studies examining the effectiveness of negative rates by exploring both retail deposit intensity and holdings of excess reserves at the central bank. The study used “confidential-level data” covering 70% of assets and 80% of loans at 252 banks in the euro area in a sample running to March 2018.
They said the study, for example, contrasts earlier papers showing that negative rates had reduced syndicated lending, party because it has a sample with a “wider coverage.”
“We find that the negative interest-rate policy has been expansionary by inducing highly-exposed banks to increase their lending activity in an effort to mitigate the adverse impact” on their profitability, they said.
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