In the novel monetary environment of negative interest policy rates (NIPR) in the Euro area, it is questionable whether the existing findings on determinants of Net Interest Margins (NIM) still hold. This paper analyzes differences in the development of NIM across business models represented by a set of three indicators prior to and after the introduction of NIPR. The strategies are based on a binary categorization between high and low levels of the business indicators using a median, 67-33 and 80-20 percentile cut-off rule. I use a difference in differences (DiD) estimation approach, even though NIPR impact all banks’ NIM. Thus, the obtained estimates do not measure the impact of NIPR itself, but the DiD between strategies. I mostly find positive albeit insignificant effects on banks with low asset held for trading, high deposit and customer loan ratios. In contrast, the DiD coefficient for banks with high deposit-based financing using an 80-20 cut-off is -14 bp, which proves to be a highly significant and economically relevant. These findings support the notion that multiple channels are affecting banks’ NIM.
Table of Contents
1 Introduction
2 Literature Review
2.1 Determinants of NIM
2.3 Mechanisms
3 Data and descriptive results
4 Empirical analysis and hypotheses
4.1 Model specification
4.2 Selection of treatment groups
5 Results
6 Conclusion
Research Objectives and Core Themes
This paper investigates how the environment of Negative Interest Policy Rates (NIPR) in the Euro area influences the Net Interest Margins (NIM) of banks, specifically analyzing how these effects vary across different business models and strategies.
- Impact of NIPR on bank profitability and Net Interest Margins (NIM)
- Analysis of bank business strategies using indicator variables
- Application of Difference-in-Differences (DiD) estimation approach
- Evaluation of "sticky deposit rates" and "asset repricing" as primary mechanisms
- Comparative performance of traditional/conservative banking models vs. investment-heavy models
Excerpt from the Publication
2.3 Mechanisms
Sticky deposit rates: The central mechanism to whom the non-linear relationship between interest rates and NIM was attributed to is the “downward stickiness in deposit rates” (Turk, 2016). While banks in general seem to lack in their response of adjusting deposit rates relative to their loan rates, it is particularly relevant under NIPR. Referring to Ho and Saunders (1981) model, the bank is setting deposit rates depending on the key policy rate i and the mark-up a, where i is exogenously given by the central bank. Apart from depositing, bank customers have the option to hold the zero-interest yielding currency. Holding the currency is however associated with costs (e.g. storing, insurance, …) and benefits (immediacy, liquidity, safety). Whenever the utility of holding the currency is higher than the utility associated with depositing it, customer will prefer to hoard money. This is likely to vary between different customer groups e.g. (corporate vs. retail). Banks however benefit on deposits as a source of funding, since especially retail deposits are considered a very stable source (see Drechsler et al., 2018) and favorably treated under new liquidity regulation (e.g. the Net Stable Funding Ratio). Therefore, banks are assumed to have a lower bound on deposit rates.
Summary of Chapters
1 Introduction: Introduces the economic context of negative interest rates (NIPR) and defines the study's objective to analyze the impact of NIPR on bank profitability.
2 Literature Review: Surveys existing academic literature on NIM determinants and theoretical models, focusing specifically on the mechanisms through which interest rate environments affect margins.
3 Data and descriptive results: Describes the SNL database, the sample composition of European banks, and provides an initial overview of NIM developments in the Euro area.
4 Empirical analysis and hypotheses: Outlines the DiD regression model and the selection process for bank business strategy indicators to categorize the sample.
5 Results: Presents the empirical findings of the DiD regression, discussing the observed impacts on different banking strategies and identifying the exception regarding deposit-based financing.
6 Conclusion: Summarizes that while traditional banking strategies are generally resilient, certain deposit-heavy banks experience significant margin pressure under NIPR, noting the study's limitations.
Keywords
Negative Interest Policy Rates, NIPR, Net Interest Margin, NIM, Euro area, Banking Business Models, Difference-in-Differences, Sticky deposit rates, Asset repricing, Bank profitability, Financial crisis, Monetary policy, Sparkassen, Wholesale financing, Interest rate risk.
Frequently Asked Questions
What is the core focus of this research paper?
The paper examines the effect of Negative Interest Policy Rates (NIPR) on the Net Interest Margins (NIM) of banks within the Euro area.
Which specific banking indicator variables are analyzed?
The study uses variables such as the ratio of deposits to liabilities, the ratio of assets held for trading to total assets, and the share of customer loans to categorize bank strategies.
What is the primary research methodology employed?
The author utilizes a Difference-in-Differences (DiD) estimation approach, comparing banking groups before and after the introduction of NIPR.
What are the key findings regarding conservative banking models?
Banks following more traditional and conservative models, such as those with high deposit-based financing and high customer loan ratios, generally perform better, though results vary by specification.
How does the "sticky deposit rates" mechanism function?
It refers to the phenomenon where banks are reluctant or unable to lower deposit rates further despite falling policy rates, leading to a compression of margins.
What is the significance of the 80-20 cut-off rule mentioned?
It identifies a highly significant and negative impact of -14 bp on banks with a high dependency on deposit-based financing, highlighting a major exception to the general trend.
Why are German "Sparkassen" particularly highlighted in the analysis?
They represent a large part of the treatment group for deposit-based strategies and appear to suffer disproportionately from sticky deposit rates under NIPR.
How do "asset repricing" channels influence the results?
The paper suggests that high shares of fixed-rate loans allow banks to maintain income levels temporarily, masking the negative effects of NIPR.
- Quote paper
- Valentin Stockerl (Author), 2019, Determinants of Net Interest Margins. Are Banks equally affeced by Negative Interest Policy Rates?, Munich, GRIN Verlag, https://www.grin.com/document/462285
