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Luc Laeven Negative rates and

European Central Bank

bank profitability

ADBI Annual Conference

The views expressed in this presentation are the views of the 1-2 December 2016, Tokyo
author and do not necessarily reflect the views or policies of
the Asian Development Bank Institute (ADBI), the Asian
Development Bank (ADB), its Board of Directors, or the
governments they represent. ADBI does not guarantee the
accuracy of the data included in this paper and accepts no
Disclaimer: These are my own views and
responsibility for any consequences of their use. Terminology not those of the ECB or the Eurosystem
used may not necessarily be consistent with ADB official
Rubric measures: their purpose

Aim of non-standard measures: maintain the transmission

mechanism of monetary policy when room for interest rate cuts
is limited

ECB nonstandard measures have included:

fixed-rate full allotment tenders in main refinancing operations
(targeted) long-term refinancing operations
asset purchase programmes, and
negative interest rates

Effectiveness of nonstandard measures

Measurable effects on inflation and substantially reduced

deflation risk

Opinions differ on underlying channels and adverse effects

Does QE pose financial stability risks? Impact on bank


QE and bank profitability: Multiple channels

Flattening of yield curve may compress net interest income


Zero (or negative) rates on excess liquidity imposes holding

costs (negative)

Lower loan charge-offs due to improvements in credit quality


Capital gains on securities portfolios (positive)

Search for yield (positive)

ECB policy rates: negative since 5 June 2014

Rubric asset purchases
Net purchases of private sector securities and
sovereign bonds by the Eurosystem
(12-month cumulated flows in bn)

Source: ECB.
Latest observation: August 2016.

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Euro-area banks: interest rates on new loans and deposits

Source: ECB Statistical Data Warehouse - MIR Data

Note: All rates are averages for euro denominated loans and deposits in the euro area. Deposit rates are rates on new overnight deposits.
Loan rates for NFCs are rates on new loans other than revolving loans and overdrafts, convenience and extended credit card debt.
Loan rates for households are rates on new loans for house purchases excluding revolving loans and overdrafts, convenience and extended credit card debt.
The vertical red line indicates June 2014. On June 5, 2014 deposit facility rates were set below zero for the first time. Latest observation: May 2016.

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Euro-area large banks: net interest margin

Sources: SNL Financial and ECB calculations

Note: Based on publicly available data for 27 euro area banking groups for which quarterly P&L data is available. Annualised average net interest margins. The net
interest margin is calculated as net interest income over total assets.

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Rubric decline in lending rates continues to depress loan-deposit margins

Interest rate pass-through from reference rates

to cost of borrowing for NFCs Loan-deposit margins on new business
(basis points; May 2014 August 2016) (percentages per annum)

Source: ECB. Source: ECB.

Last observation: August 2016. Latest observation: August 2016.

Euro-area large banks: aggregate net income


50 Other
interest Opera-
income ting Net
costs income
40 ments
EUR billions




Source: ECB Financial Stability Review, May 2016. Based on SNL Financial data.
Note: Based on publicly available data for a sample of 83 euro area systemic banking groups.

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Rubric to the private sector recovers gradually, remaining stable in August

Breakdown by residence of MFI loans originated Breakdown by residence of MFI loans originated
to NFCs to HHs
(annual percentage changes) (annual percentage changes)

Source: ECB. Source: ECB.

Notes: Loans adjusted for sales, securitisation and cash pooling activities. Notes: Loans adjusted for sales, securitisation and cash pooling activities.
Last observation: August 2016. Latest observation: August 2016.

U.S. banks: increasing net income

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despite falling net interest margins for large banks

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supported by gains on securities

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and reduced loan delinquency rates

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Rubricequity market developments around monetary policy announcements

Sources: Bloomberg and ECB calculations.

Notes: Normalised to 100 at close of business day prior to event. Vertical dotted lines represent the start of a new business day, the straight lines show the timing of the event .
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Assessment meeting, 6 October 2016

Nonstandard measures have supported inflation and growth

Need to distinguish between short and long-run impacts on bank

profitability and financial stability

Risk taking may also be affected.* But what if there is too little risk
taking in the economy?

Negative rates less of a concern as long as short-lived and growth


* Dell Ariccia, G., L. Laeven, and G. Suarez, 2016,

Bank Leverage and Monetary Policy's Risk-Taking Channel, Journal of Finance

Dell Ariccia, G., L. Laeven, and R. Marquez, 2014,

Real Interest Rates, Leverage, and Bank Risk-Taking, Journal of Economic Theory

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