## pp080317-negative-interest-rate-policies ## Source details **Canonical URL:** [pp080317-negative-interest-rate-policies](https://www.imf.org/-/media/files/publications/pp/2017/pp080317-negative-interest-rate-policies.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2017/pp080317-negative-interest-rate-policies.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2017/pp080317-negative-interest-rate-policies.pdf.json) --- ### EXECUTIVE SUMMARY — Overview and context - Date: March 13, 2017. - Seven central banks have recently lowered policy rates below zero: Bulgaria, Denmark, the euro area, Hungary, Japan, Sweden, and Switzerland. - Purpose: analyze implications of negative interest rate policies (NIRPs) for monetary policy transmission and banks’ behavior, focusing on the bank transmission channel and cross-country case studies. ### Key findings on transmission and outcomes - NIRPs appear to have had positive, albeit likely small, effects on domestic monetary conditions. - Evidence and outcomes: - Some evidence of declines in loan and bond rates associated with NIRPs. - Banks’ profit margins have been mostly unchanged. - No notable shifts to physical cash so far. - No major internal side effects on bank profits, payment systems, and market functioning to date. ### Theory and operational constraints - In a cashless economy, negative nominal interest rates pose nothing special in theory: further cuts translate into lower money market and bond yields and support demand via improved wealth and cash flows. - Cash introduces an “effective lower bound”: cash has a zero gross nominal rate of return; holding cash can be attractive when safe nominal rates turn negative. - Practical limits: as rates approach the point at which most agents switch into cash, further cuts become ineffective or counterproductive if they hinder financial intermediation. ### Bank transmission channel and deposit-rate barriers - Mechanism: - A negative policy rate reduces returns on banks’ reserves at the central bank (the outside option for banks). - With sufficient competition, lending rates should fall and banks would attempt to reduce deposit rates to support margins. - Concerns: - Deposit rates may not follow policy rates into negative territory because agents can switch into cash. - If deposit rates hit a floor at zero while lending rates decline, bank margins could be squeezed. - Compressed profitability could lead banks to reduce lending to protect capital ratios. - Bank offset options: fees and commissions, cost cutting, volume expansion. ### Cash as an effective lower bound and mitigants - Cash yields zero gross nominal return; net return on cash may exceed negative deposit returns once deposit rates go below zero. - Theoretical mitigants to reduce cash attractiveness (untested and controversial): - Impose a de facto negative return on cash holdings (e.g., periodic validation/stamps). - Engineer depreciation of cash relative to central-bank reserves or electronic money. - Central-bank time-varying deposit fees at cash windows (Agarwal and Kimball (2015)). - Switching-to-cash costs: - Storing, moving, insuring cash imposes non-negligible costs (fixed and variable). - Costs vary across agents; large depositors and frequent payers face higher switching costs per unit. - Deposit rates may need to be sufficiently negative, or expected to remain negative for long, before large-scale switching into cash is optimal. - Annex II: discusses theoretical tipping point where moving into cash becomes worthwhile (Annex II estimates range from 75bp to 200bp in one country-specific discussion). ### Practical bank reluctance to impose negative deposit rates - Reasons banks avoid negative retail deposit rates: - Unpredictable agent behavior and non-linear cash withdrawal effects risk liquidity and stability. - Reputational and market-share concerns; perception of “taxing savers”. - Competitive pressures: first movers risk losing clients; banks with less deposit competition find it easier. - Evidence: large institutional clients have been charged negative deposit rates in some cases. - Even slightly negative deposit rates may induce depositors to substitute into financial and real assets, boosting asset prices and aggregate demand. ### Design features of NIRPs affecting profitability - Direct impact depends on the share of bank assets held as central bank reserves: - For every 10 percent of bank assets held as central bank reserves, a charge of 100 basis points would have a direct impact on overall returns on bank assets of about 0.1 percent. - Cross-country reserve shares cited: - Japan: around 16 percent (in 20016 as stated in source). - Switzerland: around 14 percent (in 20016 as stated in source). - Denmark: just below 3 percent on average. - Mitigation: “tiering” systems where only a fraction of reserves are charged the negative policy rate. ### Comparison of NIRPs and QE (Box 2) - Commonalities: - Both boost asset prices and macroeconomic conditions, supporting bank profitability via capital gains, improved borrower creditworthiness, and higher loan demand. - Both can reduce intermediation margins if retail deposit rates cannot become negative. - Differences: - QE erodes profits from maturity transformation in the short run by flattening the yield curve and compressing term premia. - NIRPs shift yields downward across maturities and may have a more muted effect on term premia. - Case evidence: - Switzerland and Denmark: NIRPs reduced government bond yields across all maturities, supporting a mild steepening of the yield curve. - Incomplete pass-through to retail depositors limited banks’ ability to lower short-term funding costs. ### Empirical evidence and cross-country case-study stylized facts - Empirical challenges: few events, limited public data, concurrent policy measures complicating isolation of NIRP effects. - Common empirical regularities: - Transmission to money market and bond yields generally worked well; retail deposit rates showed a positive floor. - Short-term lending rates declined somewhat in all countries with NIRPs. - Bank profit margins largely unchanged to date; where margins fell, gains from volume, fees, cost cuts, and capital gains often offset declines. - Limited evidence of widespread cash hoarding. - Selected exact policy-rate observations and instruments (preserve values as in source): - Denmark (Certificates of deposit, two tiers): -0.20 percent (July 2012-early 2014); -0.05 percent (Sept. 2014); -0.20 percent (Jan. 19, 2015); -0.35 percent (Jan. 22, 2015); -0.50 percent (Jan. 29, 2015); -0.75 percent (Feb. 5, 2015); -0.65 percent (Jan. 8, 2016). - Euro Area (no tiers): Deposit rate -0.10 percent (June 11, 2014); -0.20 percent (Sept. 10, 2014); -0.30 percent (Dec. 9, 2015); -0.40 percent (March 16, 2016); QE increased by €20 billion/month (until March 2017). - Japan (three tiers): Deposit rate -0.10 percent (Feb. 16, 2016). - Switzerland (one tier): Sight deposits at the SNB (with an exemption threshold) -0.75 percent (Jan. 15, 2015). - Sweden (no tiers): Repo rate -0.10 percent (Feb. 12, 2015); -0.25 percent (March 18, 2015); -0.35 percent (July 2, 2015); -0.50 percent (Feb. 11, 2016); QE of SEK10 billion, additional QE of SEK30 billion and SEK45 billion referenced. - Country-level outcomes (selected summary): - Sweden: outlook for inflation improved; growth and unemployment improved; margins narrowed to just below 2 percent from 2¾ percent; household credit growth averaged 7½ percent y/y in 2016. - Denmark: krona appreciation pressures moderated after policy moves; lending volumes continued decline; average lending-deposit margins broadly unchanged July 2012–May 2016. - Switzerland: entire sovereign yield curve turned negative; sight-deposit exemption threshold set at 20 times each domestic bank’s minimum required reserves (adjusted by cumulative cash withdrawals). - Euro area: staff estimate negative rates contributed about one percentage point to corporate lending growth since July 2014; between June 2014 and May 2016 average loan rates decreased by around 0.8 percentage points while average deposit rates decreased by around 0.2 percentage points. - Japan: interbank funding rate (3-month TIBOR) fell from 17 bps to 6 bps after NIRP; BOJ introduced a three-tier reserve system with a -0.1 percent policy-rate balance. ### Bank profitability, heterogeneity, and medium-term risks - Overall: bank profits have consequently also remained mostly unchanged. - Offsetting factors where margins declined: - higher lending volumes - fees and commissions - cost cutting measures - capital gains - lower provisioning costs - Heterogeneity: - Banks with higher shares of flexible-rate and shorter-maturity loans, and with greater reliance on deposit funding, have on average benefited the least. - In the euro area, such banks tend to be in countries in southern Europe. - Risk amplification if NIRPs persist or deepen: - One-off capital gains may tail off; increasing share of loans repriced at lower rates could constrain profits. - Lower profits reduce retained earnings, weakening capital buffers and potentially increasing risk-taking incentives. - Large compression in profitability could curb bank lending via binding leverage constraints (Brunnermeier and Koby 2016 framework). - System-wide lending compression is considered less likely because competition and non-bank lenders could pick up slack. ### Effects on other financial intermediaries and stores of value - MMFs and money markets: - Europe: MMFs provide about 50 percent of bank short-term funding. - U.S.: MMFs fund about 20 percent of repos and commercial paper markets (IMF (2015)). - NIRPs can reduce money market activity and create rebalancing into bank deposits or cash; evidence mixed across jurisdictions. - Pension and insurance companies: - Vulnerability when asset returns fall below guaranteed returns on liabilities; NIRPs exacerbate low-rate pressures but should not create a discontinuity as rates move from positive to negative. ### Country case specifics (selected numeric and policy points) - Denmark (krona defense): - DN moved the CD rate to -0.75 percent in early 2015 to complement FX interventions. - By end 2015, central bank foreign-exchange reserve accumulation had been fully reversed; DN raised CD rate by 10 basis points in early 2016. - Market funding represented about 30 percent of bank liabilities and became cheaper. - Euro area: - Estimated direct annual cost of NIRPs about €3.2 billion for euro area banks in aggregate, equivalent to 0.1 percent of total consolidated bank assets (June 2014–May 2016 estimate). - ECB did not introduce tiering; deposit rate reached -0.40 percent (March 16, 2016). - TLTRO II designed to support lending with a four-year maturity for up to 30 percent of eligible loans; conditional liquidity at marginal policy rate tied to net-lending benchmarks. - Country net lending (Dec 2014–Jan 2016, y/y): Germany +2.4 percent; France +3.4 percent; Italy +0.4 percent; Spain -4.0 percent. - Japan: - BOJ’s three-tier system: Basic Balance earns 0.1 percent; Macro Add-on Balance earns 0 percent; Policy Rate Balance subject to -0.1 percent. - Excess reserves exceeded 50 percent of GDP and more than 25 percent of total bank assets. - Switzerland: - SNB’s balance sheet reached 110 percent of GDP in September 2016. - Removal of the exchange-rate floor led the franc to appreciate by 17 percent against the euro; consumer price deflation of 1.3 percent observed. - Annual growth of currency in circulation rose from 3 percent in December 2014 to near 10 percent in late 2015, then moderated. ### Practical policy implications and recommendations - Complement monetary policy with fiscal policy, structural reforms, and financial sector policies to support recoveries; avoid placing the entire burden on monetary policy. - Consider other unconventional measures to complement NIRPs where effective. - Reducing the nominal yield on cash holdings is a theoretical option to increase policy room but proposals are untested and politically controversial. - Use macro- and microprudential tools to address housing and household indebtedness risks where applicable (examples: LTV and DTI caps, housing supply measures, elimination of tax incentives for housing). - For the euro area, further accommodation may need to rely more on credit easing and balance-sheet expansion; additional rate cuts risk weakening transmission as pass-through declines. ### Research needs and monitoring priorities - More systematic cross-country empirical analysis as experience with NIRPs accumulates. - Key foci: - Assess relative effectiveness of NIRPs versus other monetary instruments. - Study spillovers of different policies. - Examine implications for non-banks, markets, asset prices, money-market liquidity, and broader stability risks. *International Monetary Fund — NEGATIVE INTEREST RATE POLICIES (pp080317-negative-interest-rate-policies).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Overview and context - The depth of the crisis and the weakness of the ensuing recovery led central banks in several advanced economies to move policy rates to zero and initiate large-scale asset purchases; more recently several central banks lowered policy rates below the previous zero lower bound, embarking on so-called negative interest rate policies (NIRPs). - Seven central banks have recently lowered policy rates below zero: Bulgaria, Denmark, the euro area, Hungary, Japan, Sweden, and Switzerland. - This paper analyzes implications of NIRPs for monetary policy transmission and banks’ behavior, focusing on the bank transmission channel and reviewing cross-country experiences through case studies. - Date: March 13, 2017. ### Key findings on transmission and outcomes - NIRPs appear to have had positive, albeit likely small, effects on domestic monetary conditions. - There is some evidence of declines in loan and bond rates associated with NIRPs. - Banks’ profit margins have been mostly unchanged. - There have been no notable shifts to physical cash so far. - So far, there have been no major internal side effects on bank profits, payment systems, and market functioning. ### Theoretical and operational perspectives - In a cashless economy, negative nominal interest rates pose nothing special in theory: further cuts translate into lower money market and bond yields, and support demand via improved wealth and cash flows. - Once cash is introduced, an “effective lower bound” emerges: cash has a zero gross nominal rate of return, making holding cash attractive when safe nominal rates turn negative. - Practical limits arise as rates approach the point at which most agents switch into cash; beyond that point further cuts can be ineffective or counterproductive if they hinder financial intermediation. ### Bank transmission channel and deposit rates - A negative policy rate reduces returns on banks’ reserves at the central bank (the outside option for banks). - If competition is sufficient, lending rates should fall and banks would attempt to reduce deposit rates to support margins. - Concerns examined: - Deposit rates may not be able to follow policy rates into negative territory because agents can switch into cash. - If deposit rates hit a floor at zero while lending rates decline, bank margins could be squeezed. - Compressed profitability may lead banks to reduce lending to protect capital ratios. - Banks could offset margin pressure through other means (for example, fees and commissions). ### Empirical evidence and case-study experience - Empirical evaluation is challenging: events are few, publicly available data on bank lending rates and profits are infrequent and limited, and rate cuts often coincided with other announcements (asset purchases, foreign exchange interventions), complicating isolation of NIRP effects. - Country case studies and available evidence suggest: - Some decline in loan and bond rates following NIRP implementation. - Bank profit margins largely unchanged to date. - Limited evidence of shifts into cash holdings. ### Limits, risks, and medium-term considerations - Deeper cuts are likely to entail diminishing returns as interest rates reach their “true” lower bound where agents shift into cash. - If negative rates remain prolonged, markets could develop mechanisms to reduce the costs of switching to cash, increasing pressures on banks’ business models, profits, and charter values, with potential negative consequences for financial stability. - Systems with larger shares of indexed loans and where banks compete more directly with bond markets and non-bank credit providers may face greater pressure. ### Policy implications and recommendations - Monetary policy should be complemented by other policies to support recoveries: fiscal policy, structural reforms, and financial sector policies should pick up some of the burden that has rested almost exclusively on monetary policy since the crisis. - Increasing policy room by reducing the nominal yield on cash holdings is a theoretical option, but proposals are untested and politically controversial. - Other unconventional monetary policy measures can complement NIRPs to the extent they remain effective. - Avoiding hitting the effective lower bound in the future remains relevant through a broader policy mix. *International Monetary Fund, NEGATIVE INTEREST RATE POLICIES, EXECUTIVE SUMMARY, March 13, 2017.* ### 13. A barrier to the transmission of NIRPs to deposit rates is the potential for large cash ### pp080317-negative-interest-rate-policies - 13. A barrier to the transmission of NIRPs to deposit rates is the potential for large cash withdrawals from banks ### Cash as an effective lower bound and theoretical mitigants - Cash offers a zero gross nominal rate of return; its net return may be higher than negative deposit returns once deposit rates go below zero. - In theory, measures could impose a de facto negative return on cash holdings (e.g., depreciation of cash or fees), but these measures are untested and likely controversial given their costs. - Storing, moving, and insuring cash entails non-negligible costs, making the net return on cash holdings negative; some costs are fixed, others variable, depending on amounts stored. - Costs of switching to cash vary across agents: - Depositors with larger balances and those with more frequent payment needs (e.g., larger corporations vs. households) tolerate lower rates because switching costs grow non linearly with transaction size and frequency. - Deposit rates may need to be sufficiently negative, or expected to remain negative for long, before large-scale switching into cash becomes optimal for some agents. - Annex II (referenced) discusses the theoretical tipping point at which moving into cash would become worthwhile. ### Practical bank reluctance to impose negative deposit rates - Multiple practical reasons make banks wary of imposing negative rates on deposits: - Agent behavior is unpredictable; non-linear effects on cash withdrawals cannot be ruled out, risking banking system liquidity and stability. - Market share and reputational concerns: moderately negative deposit rates may be perceived as taxing savers and generate controversy. - Competition effects: the first bank to charge negative deposit rates risks losing clients to other banks; banks facing weaker competition for deposits find it easier to charge negative rates. - Banks that cater to large clients with frequent payment needs are more able to charge negative rates; evidence suggests large institutional clients have been charged negative deposit rates in some cases. - If policy rates remain negative for longer or go lower, pressure to support profitability could induce more of the banking sector to lower deposit rates below zero, but the cost of switching to cash continues to determine the effective lower bound. - Footnote point: Even slightly negative deposit rates may generate a reduction in bank deposits as households and firms substitute into financial and real assets; these substitution effects operate even under positive rate cuts and can boost asset prices and stimulate aggregate demand, aiding inflation-targeting objectives. ### Proposals to break through the zero lower bound (Box 1) - Two broad approaches proposed to lower returns on cash: - Impose a cost of holding cash (negative dividend yield), e.g., periodic validation/stamps that allow withdrawal of a fraction of notes from circulation. - Engineer a depreciation of cash (negative capital gains) relative to central-bank reserves or electronic money. - Historical and operational proposals: - Gesell (1906) / Goodfriend (2000): periodic government/central-bank validation (stamps) to impose holding costs; rarely adopted due to implementation hurdles and side-effects. - Eisler (1932) and later refinements (Buiter 2009, Kimball 2015, Agarwal and Kimball 2015, Goodfriend 2016): depreciation rate between cash and central-bank reserves to replicate intended negative policy rate. - Agarwal and Kimball (2015): central bank charges a time-varying deposit fee at its cash window; if passed on by banks, holding cash would be as expensive as negative-rate deposits. - Political and practical considerations: - Some proponents argue approaches preserving cash would be more politically acceptable; households and firms could continue using cash and prices remain in the same currency units. - Abolition of cash would be highly controversial, generate privacy concerns, and exclude some agents; proponents of cashless economies cite additional benefits (combat crime, tax evasion). - Breaking through the zero lower bound likely requires approaches in which cash continues to play a role. ### Effects on bank profitability if deposit rates remain positive - Profitability may not be hurt if lending rates remain high: - If new loans are priced at lower rates but deposit rates remain unchanged, margins fall; banks can preserve margins by keeping lending rates unchanged, but this would undermine monetary transmission. - Conditions that pressure intermediation spreads: - Contractual details of existing loans (maturity, interest rate indexation): shorter maturity and higher share of flexible rate loans make NIRPs weigh more on profits. - Degree of competition in loan markets and competition from bond markets. - Heterogeneity in funding costs across banks: banks relying on wholesale funding (corporate paper) are more likely to see funding costs fall with policy rates than banks relying on retail deposits. - Regulation (e.g., different shares of insured deposits) contributes to heterogeneous funding costs. - Possible shift of market share to alternative forms of financial intermediation less reliant on retail funds. - Banks’ alternative responses to support profits: - Cut costs, reduce provisioning costs due to lower policy rates, increase lending volumes to cover fixed costs, and charge fees and commissions. - Example: a 5 euro per month fee on a 60,000 euro account is equivalent to 10 bps on deposit interest rates (higher for smaller accounts). - Ability to raise fees may be curtailed by explicit government regulation (consumer protection acts); fees too large will still incentivize switching to cash. ### Design features of NIRPs affecting profitability - Direct impact depends on the share of bank assets held as central bank reserves: - For every 10 percent of bank assets held as central bank reserves, a charge of 100 basis points would have a direct impact on overall returns on bank assets of about 0.1 percent. - Cross-country variation in reserve shares (as stated in the source): - Japan and Switzerland: shares were around 16 and 14 percent, respectively, in 20016. - Denmark: just below 3 percent on average. - Mitigation tool: “tiering” systems where only a fraction of total reserves held at the central bank are charged the negative policy rate. ### Comparison of NIRPs and QE for bank profitability (Box 2) - Both NIRPs and QE support bank profitability by boosting asset prices and strengthening macroeconomic conditions (positive valuation gains on government bond holdings; improved borrower creditworthiness; higher loan demand). - Both policies can reduce intermediation margins if retail deposit rates cannot become negative, squeezing profitability. - QE notably erodes profits from maturity transformation in the short run by flattening the yield curve and compressing term premia; NIRPs tend to shift yields downward across maturities and may have a more muted effect on term premia. - Empirical note from selected country cases: - In Switzerland and Denmark, adoption of NIRPs led to a reduction of government bond yields across all maturities, if anything supporting a mild steepening of the yield curve. - In practice, incomplete pass-through of negative policy rates to retail depositors has limited banks’ ability to lower short-term funding costs, leading to some reduction in earnings from maturity transformation under NIRPs. ### If bank profitability declines: implications for lending rates and volumes - Models (e.g., Brunnermeier and Koby 2016) suggest large compression in profitability could curb bank lending via binding leverage constraints: - Lower policy rates compress intermediation margins while deposit rates face a ZLB, reducing bank capital; if regulatory limits are hit or access to wholesale funding is impaired, banks may curb lending rather than raise costly equity. - System-wide lending compression is less likely: - Competition implies other banks or non-bank lenders could pick up slack if some banks curtail lending. - If indexed loans are a large share of portfolios, margins could compress automatically; absent such factors, banks should be able to maintain lending rates unchanged (which undermines monetary transmission but need not reverse lending). - It is difficult to construct a case where monetary policy transmission is perverse and system-wide financial stability is severely undermined. *International Monetary Fund — Negative Interest Rate Policies (source content provided).* ### Box 2. Figure 1. Yield Curve Movements Around NIRP Announcements ### Box 2. Figure 1. Yield Curve Movements Around NIRP Announcements ### Effects on banks, margins, and profitability - It is unlikely that banks would raise lending rates to compensate for the cost of holding reserves at negative rates alone. - Reserves tend to be a relatively small percentage of bank balance sheets so the direct cost of NIRPs tend to be small. - Raising lending rates could be counter-productive if higher lending rates lead to lower lending and, everything else equal, greater exposure to costly reserve balances. - Even where some mortgage rates increased somewhat following NIRPs, they quickly corrected thereafter. - The potential for lower intermediation margins and bank profitability raises financial stability concerns if NIRPs persist: - Retained profits are an important avenue for banks to increase and maintain capital; lower profits mean lower buffers unless new equity is raised. - Lower intermediation margins can decrease a bank's charter value and increase risk-shifting incentives associated with limited liability and asymmetric information. - Compression in intermediation margins may induce banks to engage in riskier credit and maturity transformation to protect profitability. - Banks could switch from deposit to cheaper—but less stable—wholesale funding; in general equilibrium, wholesale funding costs could eventually increase, offsetting substitution incentives. ### Transmission to other financial intermediaries and stores of value - As yields become more negative, transmission differs outside the banking system: - If nominal returns from money market investments become negative, agents may rebalance money holdings into bank deposits (if banks keep deposit rates above zero) or physical cash. - Such substitution could create liquidity management challenges for money market mutual funds (MMFs). - If agents substitute into non-money store-of-value assets (gold, real estate), overall money demand may decline. - NIRPs could have a contractionary effect on credit supply where non-bank funding or MMF funding to banks and corporates is large: - In Europe, MMFs provide about 50 percent of bank short-term funding. - In the U.S., MMFs fund about 20 percent of the repos and commercial paper markets (IMF (2015)). - Pension and insurance companies: - Key vulnerability arises when asset returns fall below companies' guaranteed returns on liabilities. - NIRPs exacerbate effects of low (but positive) policy rates and QE; however, as rates move from positive to negative territory, there should be no discontinuity in non-bank profits. - Some safe haven government bonds exhibited negative yields even before central banks implemented NIRPs. ### Evidence from cross-country experience and case studies - Timeframe and scope: - Case studies cover countries with NIRPs since as early as July 2012 in Denmark and later in other countries. - Focus on transmission to market interest rates, bank profitability, market activity, and exchange rates. - Commonalities and goals: - Central banks deployed NIRPs for similar motives: to raise inflation and/or decrease appreciation pressures. - Examples: - Euro area, Japan, Sweden: adopted NIRPs to combat deflationary pressures and raise inflation. - Denmark: primarily to defend the peg. - Switzerland: hybrid goal—support growth and inflation and stem appreciation pressures. - Success relative to goals (mixed): - Sweden: outlook for inflation markedly improved, probably in part due to NIRPs (asset purchases also instrumental). - Denmark: appreciation pressures on the krona dissipated; central bank reversed foreign currency reserve accumulation; policy rates marginally tightened. - Switzerland: deflation close to being eliminated and appreciation pressures eased, though franc remains overvalued. - Euro area: credit conditions eased and loan growth turned positive; medium-term inflation outlook improved gradually since NIRPs began. - In other countries, outlook for inflation and growth remains subdued; counterfactual (outcomes without NIRPs) cannot be discounted. - Transmission to money market and bond yields: - Transmission worked well to money market and bond yields, though deposit rates mostly remained positive. - Figure 1a highlights a positive floor on retail deposit rates. - Some banks charged negative rates on large deposits where corporate clients have access to money markets (Denmark, Sweden, Switzerland) to avoid arbitrage. - Some banks bypassed the effective lower bound on retail deposits by imposing higher fees. - Lending rates and volumes: - Short-term lending rates declined somewhat in all countries with NIRPs (Figure 2a). - Within the euro area, countries with higher shares of flexible rate loans (Italy, Spain, Portugal) saw higher pass-through of policy rates to lending rates. - In a few instances, longer-term mortgage rates increased (e.g., Switzerland), but these reversals make attribution to NIRPs difficult. - Figure 2b provides evidence that NIRPs may induce banks to search for yield. - Long-term mortgage rates in the euro area stabilized since mid-2015, and lending volumes have increased rather than contracted. - Exchange rate effects (mixed and often short-lived): - Measuring NIRP effects on exchange rates is difficult due to concurrent swings in global risk environment and other factors. - Figure 3 shows evolution of exchange rates after NIRP introductions: some reduction in exchange rate level in many cases, but overall nominal effective exchange rate movements appear short-lived. - Case-specific examples include: - Swiss exit of exchange rate floor coincided with policy rate cuts (Dec. 2014 to Jan. 2015). - Swedish and Danish krona responses vary across events (e.g., Swedish cuts in Feb.–Mar. 2015, Jul. 2015, Feb. 2016; Danish cuts Sep. 2014 and Jan. 2015). ### Country-level summaries and stylized facts (from Table 1 and Table 2) - Instruments and notable policy rates (selected exact values preserved): - Denmark (Certificates of deposit, two tiers): -0.20 percent (July 2012-early 2014); -0.05 percent (Sept. 2014); -0.20 percent (Jan. 19, 2015); -0.35 percent (Jan. 22, 2015); -0.50 percent (Jan. 29, 2015); -0.75 percent (Feb. 5, 2015); -0.65 percent (Jan. 8, 2016). - Euro Area (no tiers): Deposit rate -0.10 percent (June 11, 2014); -0.20 percent (Sept. 10, 2014); -0.30 percent (Dec. 9, 2015); -0.40 percent (March 16, 2016); QE increased by €20 billion/month (until March 2017). - Japan (three tiers): Deposit rate -0.10 percent (Feb. 16, 2016). - Switzerland (one tier): Sight deposits at the SNB (with an exemption threshold) -0.75 percent (Jan. 15, 2015). - Sweden (no tiers): Repo rate -0.10 percent (Feb. 12, 2015); QE of SEK10 billion; -0.25 percent (March 18, 2015); additional QE of SEK30 billion; -0.35 percent (July 2, 2015); additional QE of SEK45 billion; -0.50 percent (Feb. 11, 2016): QE continues, based on decisions at other meetings. - Effects on yields and curves: - Euro area: Full transmission to money market rates; lower term premia (also due to the Asset Purchase Program). - Japan: Full transmission to money market rates; lower and flatter yield curve. - Denmark: Full transmission to money market rates (except when policy rates are their min); lower and steeper yield curve. - Sweden: Full transmission to money market rates; lower and flatter yield curve. - Switzerland: Full transmission to money market rates; entire yield curve turned negative. - Effects on bank net interest margins and profits: - Euro area: Somewhat lower margins as lending rates decreased more than deposit rates; lower margins offset by higher lending volumes, fees, cost cuts, capital gains, lower provisioning costs. - Japan: Lower margins as lending rates decreased more than deposit rates; impact differed across institutions. - Denmark: Broadly unchanged margins as lending rates have not decreased much and cheaper wholesale funding helped; minimal effects on profits. - Sweden: Broadly unchanged margins, aided by cheaper wholesale funding; minimal effects on profits. - Switzerland: Slight increase in margins as stable lending rates while average deposit rates were lower; minimal effects on profits, some capital gains on securities. - Across countries, banks benefited from cheaper wholesale funding; no clear relationship visible between policy rates and banks’ net interest margins over time (Figure 4). - Effects on cash hoarding and other financial stability concerns: - No cash hoarding detected across case studies. - Concerns persist about longer term profitability of banks if negative rates persist or are cut further. - Concerns about viability of pension funds and life insurance companies if negative rates persist. - Money markets liquidity: money markets less liquid in some cases (Denmark), repo markets still liquid in others. - Increase in house prices in some segments due to low mortgage rates observed in some jurisdictions. ### Empirical regularities and graphical evidence (figures referenced) - Figure 1A. Households' deposit rates (Percent, maturity less than 1 year) — shows a positive floor on retail deposit rates across Euro, Sweden, Denmark, Switzerland, Japan (Jan/2012–Jan/2016). - Figure 1B. Rates on large deposits, Denmark (Percent, maturity less than 1 year) — shows instances of negative rates for large deposits and divergence across household and non-financial corporation series. - Figure 2A. Lending rates (Percent, maturity less than 1 year) — short-term lending rates declined across Denmark, Sweden, Euro area, Switzerland, Japan (Jan/2012–Jan/2016). - Figure 2B. Mortgage rates and lending volumes in Euro Area (Maturity over 5 years. Rates: percent. Volume: € millions) — indicates search-for-yield behavior and rising lending volumes (Jan/2013–Jan/2016; Rates and Volume plotted). - Figures 3a–3c. Interest Rate Differential and Exchange Rate 2011–16: NIRP events — show market reactions for 30 days following rate cuts to negative territory for Sweden, Denmark, Switzerland, Euro Area, Japan; responses vary across events with appreciation/depreciation dynamics. - Figure 4A. Net interest margin (Percent of total bank assets) and Figure 4B. Return on bank assets (Percent) — display resilience of banks’ net interest margins and varied ROA across jurisdictions (2011Q4–2015Q4). - Figure 5. Equity Price Response to Negative Rates (daily cumulative change) — shows cumulative change in equity and bank equity share prices since first rate cut displayed. *Source: pp080317-negative-interest-rate-policies - Box 2. Figure 1. Yield Curve Movements Around NIRP Announcements* ### 33. Bank profits have consequently also remained mostly unchanged. ### pp080317-negative-interest-rate-policies - 33. Bank profits have consequently also remained mostly unchanged. ### Bank profitability and drivers - Bank profits have consequently also remained mostly unchanged. - Where interest margins have taken a small hit, profits have been buoyed by other factors, including: - higher lending volumes - fees and commissions - cost cutting measures - capital gains - lower provisioning costs warranted by borrowers with improved balance sheets - Following an initial deterioration around the implementation of NIRPs, bank and other equity prices have recovered and, in some cases, recently rallied (Figure 5). ### Heterogeneity across banks and longer-term concerns - Not all banks have performed equally; some concerns have arisen over longer term profitability. - Banks with higher shares of flexible rate and shorter maturity loans, and with greater reliance on deposit funding have, on average, benefitted the least from lower policy rates. - In the euro area, these banks tend to be in countries in southern Europe. - For some banks longer term concerns have emerged, especially in the euro area and Japan. - Conditional risk: Should NIRPs persist or rates be cut further, bank profits could eventually be constrained. - Amplifying factors: Effects would be amplified as one-off factors such as capital gains tail off, and an increasing share of loans are repriced at lower rates. ### Other observed side effects (or lack thereof) - There is little evidence of cash hoarding to date. - House price inflation seems under control, except in some segments of the Danish market. - Household indebtedness is reported as a concern in: - Sweden - Switzerland (where the problem is longstanding) - Policy response suggested: appropriate and targeted macro and microprudential measures, coupled with structural reforms of the housing market where needed. ### Money market activity and money market funds (MMFs) - The impact of NIRPs on money market activity (including repos) and money market funds has been mixed and warrants monitoring. - NIRPs appear to have been associated with reduced money market activity, beyond already subdued levels (Figure 6). - Europe: gross issuance of shorter-dated Short Term European Papers (STEP) fell sharply as yields declined below zero. - Japan: repo market volumes recovered after the introduction of NIRPs; repo rates were occasionally negative even before the BOJ’s policy rate cut. - Euro area MMFs: NIRPs do not seem to have reduced investment in MMFs in the euro area despite negative returns to MMF investment (measured by changes in net asset value—MMF share price) as NIRPs were nearly fully transmitted to money market rates (Figure 7). - Japan MMFs: MMFs stopped accepting new funds after the BOJ’s decision to adopt NIRPs in January; in March, the BOJ decided to exempt certain short-term funds from negative rates to discourage investors from switching to bank deposits. ### Evidence from graphical annotations (selected numeric observations from figures) - SWE Feb 2016: -0.35 to -0.5 - EA Dec 2015: -0.2 to -0.4 - EA July 2012: 0.25 to 0 - CHE August 2011: 0.25 to - CHE Dec 2014 and Jan 2016: 0 to -0.75 - DEN May 2012: 0.2 to 0.05, then to -0.20 - DEN Jan 2015: -0.05 to -0.75 - SWE Oct 2014: 0.25 to 0, then to -0.10 - JPN Jan 2016: 0.1 to -0.1 ### Concluding remarks and policy implications - Since the onset of the crisis, central banks deployed new tools including quantitative easing, forward guidance, and in some jurisdictions, NIRPs. - The main operational difference between policy interest rate cuts above and below zero hinges on the role of cash and the effective lower bound. - Policy-rate cuts reduce market interest rates and bank lending and deposit rates; effects on bank profitability are ambiguous and depend on: - flattening of the yield curve and lower term and risk premia (reducing lending margins) - stimulation of aggregate demand, improved creditworthiness, and lower provisioning needs (supporting profitability) - capital gains from repricing of assets (transitional effect) - Once policy rates turn negative: - Banks compete with cash to attract deposits and may find it difficult to lower deposit rates much below zero. - This can lead to a lower pass-through of policy rates on lending rates and/or a squeeze of intermediation margins. - Banks can benefit from cheaper wholesale funding and support profits through commissions and fees. - Practical limits exist to pushing policy rates much further below zero; NIRPs have diminishing returns as rates approach the effective lower bound. - Possible reduction of the effective lower bound through reforms lowering the nominal yield on cash holdings is untested and politically controversial. - Recommendation: other policies—fiscal policy and structural reforms—should pick up some of the burden that has rested almost exclusively on monetary policy since the crisis. ### Further research needs - More systematic cross-country empirical analysis as experience with NIRPs accumulates. - Key foci: - Assessing relative effectiveness of NIRPs versus other monetary policy instruments. - Associated spillovers of different policies. - Implications for non-banks, markets, asset prices, and broader stability risks. *International Monetary Fund — NEGATIVE INTEREST RATE POLICIES (excerpts from pp080317-negative-interest-rate-policies - 33.)* ### 2014. But capital inflows intensified in early ### pp080317-negative-interest-rate-policies - 2014. But capital inflows intensified in early ### Denmark: krona defense and NIRP implementation - Capital inflows intensified in early 2015 as the Swiss National Bank abandoned its exchange rate ceiling, and the ECB announced its asset purchases program. - To complement heavy intervention in the foreign exchange market to counter krona appreciation pressures, the DN moved the CD rate to -0.75 percent in early 2015. - Pressures on the krona waned in March 2015. - By end 2015, the substantial build-up of foreign exchange reserves by the central bank was fully reversed. - In early 2016, the DN even raised the CD rate by 10 basis points. ### Transmission, lending, and banks (Denmark) - Market interest rates tended to track the policy rate, but the transmission was weaker than with positive rates. - The correlation between policy and market rates was very high until early 2015, when policy rates plunged to their trough. - Lower market rates did not translate into higher lending; lending volumes continued their decline from a peak in 2009. - Banks appear unscathed: - Average lending-deposit margins have remained steady between July 2012 and May 2016, broadly unchanged from their 2009-2012 mean. - Deposit rates exhibited downward rigidities (only large corporates and institutional clients face negative interest rates). - Market funding (representing about 30 percent of bank liabilities) became cheaper. - Cuts in policy rates were not entirely passed through to lending rates. - Strong bank profitability was bolstered by higher fee income and low impairment charges (partly a result of improved borrower debt-servicing capacity). - No evidence of cash hoarding among corporates or households. ### Financial stability risks and policy recommendations (Denmark) - Low mortgage rates by historical standards have boosted house prices in some segments; highly indebted households could become vulnerable to a reversal in prices if sustained. - Policy action is warranted to: - loosen housing supply restrictions, - eliminate tax incentives for housing, - develop and implement targeted macroprudential tools (such as LTV and DTI caps). ### Euro area: NIRPs as part of a package to support price stability - In June 2014, the ECB introduced NIRPs among other policies. - The ECB lowered the deposit rate to negative 0.40 percent (March 16, 2016), setting the effective marginal policy rate given the excess liquidity in the banking system. - Unlike some other central banks, the ECB has not introduced a tiering system to cushion the cost of NIRPs for banks holding excess reserves. - NIRP effects: - Negative policy rates were quickly transmitted to various key rates; money-market rates closely tracked the policy rate due to excess liquidity. - Expectations of future money market rates decreased in response to the ECB’s forward guidance. - Lending rates for corporates and households decreased, mostly via a reduction in term premia; credit has expanded modestly. - ECB staff estimate that negative rates have contributed about one percentage point to corporate lending growth since July 2014. ### Bank profitability and distributional effects (Euro area) - Between June 2014 and May 2016: - Average loan rates decreased by around 0.8 percentage points. - Average deposit rates decreased by around 0.2 percentage points, effectively reducing the lending margin. - The decline in lending margins was offset by higher lending volumes and lower wholesale funding cost; net interest income actually increased between 2014 and 2015. - Banks benefited from capital gains, lower risk provisioning, small increases in fees and commissions, and cost cutting measures. - Direct cost of NIRPs: - Estimated direct (annual cost) about €3.2 billion for euro area banks in aggregate, equivalent to 0.1 percent of total consolidated bank assets. - The direct cost has been borne disproportionately by banks with excess liquidity at the ECB. - Structural and country risks: - In countries such as Italy, Spain, and Portugal, pass-through of policy rates to lending rates tends to be high due to a high share of variable-rate or amortizing loans. - Banks’ ability to shift to cheaper wholesale funding is limited by deposit bases and the transition to the NSFR requirement. - On the whole, euro area banks continue to suffer from low profitability; a wedge persists between euro area and U.S. banks’ price-to-book ratios. - Staff analysis suggests that, even with a cyclical recovery, 30 percent of the European banking system or about $8.5 trillion of system assets will still remain weak, falling short of meeting a cost of equity of 8 percent. ### Policy implications for the euro area - Given constraints, further monetary accommodation may need to rely more on credit easing measures and a further expansion of the ECB’s balance sheet. - Additional cuts in policy rates could weaken monetary transmission as pass-through to deposit and lending rates will likely decline, bank profits come under strain, and deposits shift to cash. - Asset purchases and credit easing should raise asset valuations and aggregate demand, while also supporting bank lending. ### Japan: NIRP as part of reflationary measures - The BoJ announced NIRPs at the end of January 2016; a negative interest rate on excess reserves was implemented on February 16, 2016. - Objectives were to (i) put downward pressure on short-term interest rates while reinforcing forward guidance, and (ii) raise inflation expectations by dispelling concerns that QQE had reached its limits and reconfirming commitment to the inflation target. - Transmission and market effects: - NIRPs helped lower market rates and accelerate portfolio rebalancing; the yield curve shifted down and flattened, with 10-year benchmark yields falling below zero. - Transmission to short-term money market rates was almost complete: the interbank funding rate (3-month TIBOR) fell from 17 bps at the beginning of 2016 to 6 bps after the introduction of NIRPs. - Lending and deposit rates fell, compressing lending margins; banks with higher dependence on deposit funding or larger excess reserves lowered deposit rates relatively more. - Corporate debt issuance picked up, especially in long maturities. - Economic impact muted: - Any positive effects from NIRPs have likely been overshadowed by rising global growth concerns and financial volatility. - Growth in credit by private financial institutions did not show significant improvement during 2016. - BoJ measures to protect bank profitability: - A three-tier reserve deposit system was introduced: - First tier (Basic Balance) continues to earn 0.1 percent. - Second tier (Macro Add-on Balance) earns a zero rate of return; consists of required reserves and an added balance revised quarterly in line with the BoJ’s monetary base target. - Third tier (Policy Rate Balance) is subject to the -0.1 percent interest rate. - Excess reserves accounted for more than 50 percent of GDP and more than 25 percent of total bank assets. - The Macro Add-on balance also includes the average amount outstanding of various loan support and funds-supplying operations by the BoJ and money reserve funds entrusted to institutions. - New monetary framework introduced in September aims to more explicitly control the slope of the yield curve through an explicit long-term interest rate target to maximize easing impact while minimizing adverse effects on financial intermediation. - Market functioning: - Money-market transactions and amounts outstanding declined sharply after NIRPs; the uncollateralized call market gradually recovered. - Bond and repo markets appear to be functioning well; indicators of market liquidity in JGB markets have deteriorated but this is likely due to continued BoJ asset purchases. ### Sweden: rebuilding inflation credibility with NIRPs and QE - By late 2014, inflation was well below its 2 percent target; core HICP inflation slowed to just ½ percent by 2013-14. - Riksbank actions: - February 2015: announced a negative repo rate (initially at -10 bps) and started purchasing government bonds. - Over the following year, the Riksbank cut the repo rate in steps to -50 bps and expanded its bond purchase program to close to 40 percent of outstanding government debt by end 2016. - Macroeconomic outcomes: - Growth rose to over 4 percent in 2015, and is likely to exceed 3 percent in 2016. - Unemployment fell by about a full percentage point to just under 7 percent. - Core HICP inflation reached 1.1 percent in 2016 and is expected to continue rising gradually. - Surveys of inflation expectations two years ahead reached 1.8 percent at end 2016. - Financial sector effects: - Yield curve initially fell by 20-40 basis points; subsequent repo rate cuts steepened the curve. - The krona depreciated in 2014 and remained broadly stable in 2015-16. - Margins between lending and deposit rates narrowed: lending rates fell broadly in line with the policy rate after February 2015, while deposit rates remained around zero except for some large companies, nonbank financial institutions, and municipalities. - Margins have fallen to just below 2 percent, down from 2¾ percent by historical standards. - Bank profits broadly stable in 2015, supported by strong credit growth and low cost wholesale funding (accounting for over half of Swedish bank loans). - Household credit growth averaged 7½ percent y/y in 2016. - Housing price inflation slowed to about 8 percent in 2016 from around 15 percent over 2015, reflecting the impact of minimum mortgage amortization requirements effective in mid-2016. - Policy recommendations: - Limit debt-to-income ratios to help contain vulnerabilities. - Raise housing supply to moderate prices and debt sustainably. ### Switzerland: defending against large inflows with NIRPs - The Swiss franc experienced strong inflow pressures; Switzerland adopted an exchange rate floor against the euro in September 2011. - In late 2014, inflows surged fueled by expectations of QE in the euro area; the SNB intervened heavily to defend the exchange rate floor. - While maintaining the exchange rate floor, the SNB imposed a negative interest rate of minus 0.25 percent on banks’ sight deposits at the SNB in December 2014. - On January 15, 2015, the SNB discontinued the exchange rate floor and lowered the interest rate to negative (text continues beyond provided excerpt). *Source: pp080317-negative-interest-rate-policies - 2014. But capital inflows intensified in early (IMF PDF chapter).* ### 0.75 percent. The further reduction in the interest rate was intended to discourage inflows and ### pp080317-negative-interest-rate-policies - 0.75 percent ### SNB policy implementation and mechanics - The SNB combines NIRPs with foreign currency intervention as a two-pronged monetary policy. - The further reduction in the interest rate was intended to discourage inflows and prevent an unwanted tightening of monetary conditions following the removal of the exchange rate floor. - The SNB purchases foreign currency, periodically buying sizable amounts in response to capital inflow surges, and making more frequent purchases of smaller quantities. - The SNB’s balance sheet reached 110 percent of GDP in September 2016. - The exemption threshold on NIRPs: negative rates apply to sight deposits that exceed an exemption threshold of 20 times each domestic bank’s minimum required reserves, minus (plus) the increase (decrease) in cumulative cash withdrawals by the bank. - The high exemption threshold is intended to discourage banks from transmitting negative rates to retail depositors and to limit incentives to hoard cash. - The negative policy rate therefore applies mainly to sight deposits constituted after the introduction of the NIRPs, affecting banks’ willingness to place additional funds at the SNB. ### Exchange rate, inflation, and real economy effects - Removal of the exchange rate floor led the franc to appreciate by 17 percent against the euro. - Together with the fall in world energy prices, imported goods prices dropped sharply, producing consumer price deflation of 1.3 percent. - The SNB’s combined NIRP-fx intervention policy helped the franc gradually moderate and reduced volatility, including at the time of safe haven inflows triggered by the Brexit vote. - The franc remained stronger than the previous floor of 1.20 francs per euro; the Fund considered the franc to be moderately overvalued in the 2016 External Sector Report. - GDP is expected to have grown by 1.3 percent in 2016. - Inflation expectations stabilized at (positive) 0.5 percent alongside the pickup in actual inflation. ### Transmission to markets and interest rates - The 3-month LIBOR converged quickly to the policy rate after NIRPs were introduced. - Rates on longer-term instruments decreased, with the entire yield curve for sovereign paper (through to 50 years) falling into negative territory, although rates at the long end have since climbed above zero. - Cost of borrowing for households and corporates is now lower than before the introduction of NIRPs, although the pace of bank lending has been stable. - While mortgage rates initially rose somewhat, banks’ domestic lending rates have moderated only slightly. ### Financial sector effects and side effects - Negative rates, if sustained for an extended period, could strain financial institutions. - In 2015, the return on assets for Swiss cantonal banks increased modestly but remained at a low level; RoA of the Swiss G-SIBs at the consolidated group level moderated during 2015. - Some strain reflects compressed yield curves rather than negative rates alone. - Pension funds and providers of life insurance face pressure from fixed nominal interest rate commitments that are out of line with prevailing market interest rates. - Competition from nonbank credit providers could push down bank lending rates in the future. ### Cash demand and hoarding - Annual growth of currency in circulation increased from 3 percent in December 2014 to near 10 percent in late 2015, but has since moderated. - The number of CHF 1000 notes (large-denomination banknotes) has not outpaced the overall demand for cash. - Demand for cash has increased at a slower pace than at the onset of the global financial crisis. - Annex II estimates for the tipping point at which moving into cash becomes worthwhile range from 75bp to 200bp. - Country-specific factors influencing the tipping point include the value of the highest denomination banknotes (e.g., EUR500 and CHF1,000), availability of excess vault space, insurance/transportation costs, availability of alternative payment methods, and preference for cash. - Suspending issuance of large denomination notes would increase the cost of using cash as a store of value and presumably allow for a more negative rate, but the magnitude of this effect is difficult to estimate. - Theoretical schemes for taxing cash holdings appear impractical and potentially politically impossible; taxing cash held abroad would be particularly difficult for large currency areas. ### ECB TLTRO II and interaction with negative rates (Annex III) - TLTRO II design: - Funding with a four year maturity for up to 30 percent of banks’ holdings of eligible non-mortgage, non-financial sector private loans at the prevailing MRO rate. - Two components to incentivize new lending: - Conditional liquidity at the marginal policy rate (equivalent to the deposit facility rate prevailing at the allotment) if banks exceed a benchmark for net lending by January 2018 by at least 2.5 percent. - Unconditional liquidity at the MRO rate (currently 0 percent) if banks do not satisfy the lending benchmark. - The size of the decrease of the interest rate for conditional liquidity is graduated linearly depending on the percentage by which a bank exceeds its benchmark. - For banks with positive lending growth over the 12 months prior to January 2016, the benchmark is zero net lending; the benchmark is lowered by the decline in eligible net lending in the same period for banks that have seen negative lending benchmark net lending. - TLTRO II objectives and limits: - TLTRO II could mitigate adverse impacts of NIRPs on bank profitability by realigning refinancing cost to the marginal policy rate if banks meet net lending growth thresholds, thereby encouraging lending and strengthening transmission. - Meeting requirements for TLTRO II funding at the marginal policy rate implies at least 1.25 percent annual lending growth over a two-year period for banks with positive net lending over 12 months through January 2016. - Other conditions apply to banks that have been de-leveraging (e.g., lower positive annual lending growth thresholds for those de-leveraging by less than 1.25 percent; continued decline for those de-leveraging by more than 1.25 percent). - Country-level lending growth and eligibility: - Current net lending (Dec 2014–Jan 2016, y/y): EA aggregate and country values shown; selected current net lending rates: - Germany: +2.4 percent (current net lending through end-January 2016: +2.4 percent) - France: +3.4 percent (current net lending through end-January 2016: +3.4 percent) - Italy: +0.4 percent (current net lending through end-January 2016: +0.4 percent) - Spain: -4.0 percent (current net lending through end-January 2016: -4.0 percent) - Required thresholds: - Spain required benchmark: -1.6 percent net lending growth to qualify for TLTRO II borrowing at the ECB deposit rate (-0.4%). - In most countries, current lending growth falls below the required benchmark to access TLTRO II funding at favorable terms. - Even if Italian and Spanish banks satisfy required lending growth under TLTRO II, it would still be insufficient to offset the negative impact of NIRPs on profitability (as shown by the analysis of required loan growth to maintain net interest margins). - Illustrative policy rates and assumptions in TLTRO II analysis: - Deposit rate referenced: -0.4 percent. - MRO rate referenced: 0 percent. - Scenario assumptions include an increase of monthly asset purchases (until Sept. 2017) by the ECB and a reduction of the deposit rate by 10bps (as per ECB decision on March 10). - Indicative TLTRO-II borrowing rate in one scenario: -20bps weighted average borrowing rate for fully funded new lending using TLTRO-II funds. *Source: IMF staff compilation from "NEGATIVE INTEREST RATE POLICIES" (PDF chapter).* ### References ### pp080317-negative-interest-rate-policies - References ### Working papers and IMF publications - Agarwal R. and Kimball M.S., 2015, ‘Breaking Through the Zero Lower Bound’, IMF Working Paper No. 15/224 (Washington: International Monetary Fund). - Andrade, P., Breckenfelder, J., de Fiore, F., Karadi, P., and Tristani, O., 2016, The ECB's Asset Purchase Programme: An Early Assessment, ECB Working Paper 1956. - Bech, M. and A. 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