Scholarly record

COULD BANKS SURVIVE A PERIOD OF INTEREST RATES BELOW ZERO?

Silvia Trifonova

Abstract

Since the introduction of the negative nominal policy interest rates by the European Central Bank (ECB) in June 2014, there have been concerns about their impact on bank sector and hence on the financial stability. The prolonged global economic recovery, political uncertainty, low interest rates, and the changing regulatory landscape shape the environment for banks globally and influence their creditworthiness in recent years, with implications for banks’ earnings, profitability, and asset quality. The key objective of the paper is to analyze the effects of the negative nominal interest rates on the bank sector on the example of six banks from three euro area member states – Germany, Portugal and Italy. The empirical study covers the period from 2012 to 2016. The paper has the following structure: introduction; research methodology – hypotheses and data; theoretical and descriptive part; empirical evidence; conclusion. The introductory part presents the scope of scientific research and the addressed issues. When describing the research methodology of the paper, the following methods are used: theoretical and methodological study, descriptive analysis, comparative study, empirical analysis and critical analysis. Three hypotheses are tested in study: the first hypothesis is whether the ECB’s negative interest rate policy (or NIRP) causes a disintermediation risk, which poses a threat for the banks’ survival; the second hypothesis is if there is a growth in bank lending and whether negative interest rates could lead to excessive risk-taking by banks or an unbalanced asset portfolio; the last hypothesis is that the policy of nominal interest rates below zero might have negative effect on bank profitability, which could put at risk the banks’ survival in the long term. In the theoretical and descriptive part the ECB’s unconventional monetary policy and especially the NIRP are analyzed. The reasons for the ECB’s decision to implement negative nominal rates as a tool for achieving its macroeconomic objectives are explained. The historical trends for key policy interest rates in the euro area for the last decades are reviewed. Some consequences of the nominal interest rates below zero are also examined. The next section presents the empirical evidence of the study. Firstly, the participants in the research are chosen with a view the impact of the negative nominal interest rates under different macroeconomic environment to be explored. In the paper the countries with inflation rate below, almost equal and above the average for the euro area are examined. After the countries are determined, the banks for the research are selected. In fact, six banks from Germany, Portugal and Italy are chosen based on the amount of their total assets according to each country ranking. After that, some proper balance sheet and income statement indicators are analyzed, reflecting the impact of negative interest rates on the euro area bank sector, in order to give proofs to the previously stated hypothesis. The ultimate goal is to conclude if there is a risk for banks’ survival in a prolonged period of negative nominal interest rates.

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