How Would Us Banks Fare in a Negative Interest Rate Environment?

This paper uses a unique new data set to empirically examine bank-level expectations regarding the impact of negative short-term interest rates on bank profitability through net interest margins. The results show that banks differ significantly in their views regarding how profits might be affected in a negative interest rate environment and that much of this heterogeneity can be explained by cross-bank differences in the provision of liquidity services. We find that those banks that are more active in providing liquidity to borrowers anticipate suffering reduced profitability through declines in interest income on short-duration assets. The opposite is true of banks that are more active in providing liquidity to depositors as these banks expect to benefit from lower short-term funding costs. However, we find that these distributional effects wash out at the aggregate level, as liquidity provision is sufficiently well diversified across all banks.