Monetary Policy and Bank Equity Values in a Time of Low and Negative Interest Rates

Miguel Ampudia and Skander Van den Heuvel ()

No 2019-064, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Does banks' exposure to interest rate risk change when interest rates are very low or even negative? Using a high-frequency event study methodology and intraday data, we find that the effect of surprise interest rate cuts announced by the ECB on European bank equity values ? an effect that is normally positive ? has become negative since interest rates in the euro area reached zero and below. Since then, a further unexpected cut of 25 basis points in the short-term policy rate lowered banks' stock prices by about 2% on average, compared to a 1% increase in normal times. In the cross section, this 'reversal' was far more pronounced for banks with a more traditional, deposit-intensive funding mix. We argue that the reversal as well as its cross-sectional pattern can be explained by the zero lower bound on interest rates on retail deposits.

Keywords: Bank profitability; Interest rate risk; Monetary policy; Negative interest rates; ECB (search for similar items in EconPapers)
JEL-codes: E52 E58 G21 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2019-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://www.federalreserve.gov/econres/feds/files/2019064pap.pdf (application/pdf)

Related works:
Journal Article: Monetary Policy and Bank Equity Values in a Time of Low and Negative Interest Rates (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2019-64

DOI: 10.17016/FEDS.2019.064

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().