Adapting Lending Policies Against a Background of Negative Interest Rates

Since June 2014 the European Central Bank (ECB) has placed its deposit facility interest rate (DFR) at negative levels. Against this background, the question arises as to whether maintaining negative interest rates over a prolonged period can adversely affect credit institutions’ net interest income and, ultimately, the supply of credit. Euro area banks’ responses to the Bank Lending Survey (BLS) enable the banks to be classified into two groups, depending on whether their net interest income has been impaired or not by the negative rates (“affected” versus “unaffected” banks). The analysis in this article shows that the affected banks are generally not as well capitalised. This circumstance might have hindered these banks from taking on fresh risks under their lending policy in order to attempt to offset the adverse effect of the negative rates on their unit lending margins. Indeed, the banks most affected by negative interest rates tightened the terms and conditions on their loans to a greater extent than those unaffected, to optimise their risk-weighted assets and, therefore, their capital ratios. Lastly, the article shows there are no differences between both groups of banks as regards the total credit offered and that the credit supply has been adapted via loan terms and conditions and not through the total amount offered. This result suggests that the current level of the DFR (-0.4%) is not causing a contraction in the volume of credit supplied by the banks affected.