Bank risk profiles and the zero lower bound

Bank portfolio risk profiles vs the zero lower bound

Johannes Bubeck, Angela Maddaloni, José-Luis Peydró 23 April 2020

Just how that banks in the euro area respond to negative central bank interest levels may be closely associated with their individual funding structure. This column shows that they don’t generally pass negative rates to their depositors, and they seek out yield by buying riskier securities. New evidence shows that their investments are directed more towards securities issued by the private sector and securities denominated in dollars.


In June 2014, for the very first time, the Governing Council of the ECB lowered the rate on its deposit facility (i.e. the interest banks receive for depositing money with the central bank overnight) into negative territory. The rate was reduced an additional four times in the next years. Money market rates adjusted accordingly and transferred the impact of negative rates to banks’ funding costs through the wholesale market, where banks receive very short-term loans from other finance institutions. However, other resources of funding didn’t adjust very much the same. Specifically, euro area banks were reluctant to spread negative rates with their depositors, especially retail depositors, such as for example individual households. Which means aftereffect of negative rates on banks’ funding costs had not been homogeneous across banks and depended on the business model, specifically their reliance on bank deposits. As a result, chances are that negative rates also have affected the investment behaviour of banks and their risk-taking choices.

Our recent study (Bubeck et al. 2020) shows that, following the introduction of negative interest levels, systemic banks in the euro area that rely more on customer deposits committed to riskier securities portfolios. These results support the view that banks with a more substantial deposit base are more suffering from negative rates and increase risk-taking within their activities so as to boost profitability.

The transmission of low (negative) central bank interest levels to banks

A decrease in policy rates by the central bank is immediately transmitted to the overall level of short-term interest levels prevailing on the market. To comprehend how this affects the web worth of banks, it really is useful to understand that the total amount sheet of banks is normally made up of longer-term assets and shorter-term liabilities (For a straightforward illustration of a bank balance sheet start to see the ECB’s banking supervision website). A decrease in short-term interest levels affects, first and foremost, the liabilities. Provided that banks can immediately spread lower rates with their liabilities (for instance to the interest levels paid with their depositors), the rate cut enables banks to invest in themselves better value. Simultaneously, lower interest rates will probably have a small influence on the asset side of banks’ balance sheets, especially in regards to the prevailing loan book, since usually the terms of financing contract usually do not change in the short run. Furthermore, the valuation of a bank’s securities portfolio will generally increase due to lower short-term rates. Thus, a decrease in policy rates will probably improve the net worth of banks, thereby improving their budget, relaxing their financial constraints, and increasing their capacity to lend to borrowers and spend money on securities. Ultimately, lower short-term rates should expand banks’ capability to supply credit to the non-financial sectors by means of loans or investment in securities.

This reasoning relies fundamentally on the power of banks to spread the lower rates with their liabilities. However, empirical evidence implies that negative interest levels are somewhat special. Banks usually do not generally spread negative rates, especially with their retail depositors (see figure 1) (for newer evidence on negative rates put on deposits of non-financial corporations see for instance Altavilla et al. 2019). This is also true for banks with an increase of retail deposits, which rely less on wholesale funding. Furthermore, funding structures reflect underlying business models and so are difficult to improve in the short run. Therefore, negative rates result in a larger financial burden on the banks that are comparatively more reliant on customer deposits, reducing their franchise value (Ampudia and Van den Heuvel 2018, Ampudia 2019). This result may induce these banks to find yield more actively to be able to boost future profitability.

Figure 1 Central bank interest levels and market interest levels in the euro area

Note: The blue line is a daily group of the EONIA interbank interest (euro overnight index average) obtained from the ECB’s SDW. The dots and triangles show a monthly time group of the rates put on overnight household and non-financial corporation (NFC) deposits, obtained from the euro area MFI INTEREST Statistics via the ECB’s SDW. Euro area monetary finance institutions (MFIs) include banks.

Negative monetary policy rates and banks’ grab yield

In Bubeck et al. (2020), we utilize the reliance on bank deposits as a way to obtain funding as an identification technique to infer the impact of negative policy rates on the securities portfolios of large euro area banks (Heider et al. 2019 employed the same identification technique to analyse the impact of the introduction of negative rates on the lending behaviour of banks). For the reason why outlined above, banks with different deposit ratios (deposits to total liabilities) are affected differentially when central bank interest levels reach negative territory. This gives a way to identify the result of negative policy rates on bank risk-taking in securities investment and isolate it from other forces that shape both monetary policy and the investment behaviour of large euro area banks. Specifically, banks with higher deposit ratios might exhibit a stronger upsurge in risk-taking in response to negative policy rates.

In Bubeck et al. (2020), we analyse the securities portfolios of banks before and following the implementation of negative rates in June 2014, comparing banks which were more suffering from the introduction of negative interest levels (measured through their reliance on deposits) with a control group that was less affected. We use a novel database with detailed information regarding the securities holdings of the 26 largest banking sets of the euro area. The granularity of the database (with data at the amount of individual securities) we can control for the chance of the securities and all the individual characteristics. This enables us to isolate the result of the change in interest levels. Our study also restrict the analysis to the time around the very first time the ECB implemented negative deposit rates (June 2014). Specifically, this means that the result of negative rates could be isolated from other central bank interventions (notably asset purchases) which only started the next year.

An integral contribution of the analysis is to supply the first comprehensive analysis of the impact of negative rates on the securities portfolios of large banks. The granularity of the dataset also can help you track portfolio reallocations between securities from specific asset classes and currency denominations. These portfolio reshufflings (in response to the adoption of negative rates) indicate the existence of additional channels of monetary policy transmission, which sort out the securities portfolios of large banking intermediaries.

The results of the analysis claim that banks with higher deposit ratios committed to riskier securities portfolios following the introduction of negative interest levels. Furthermore, the securities portfolios of banks with a higher deposit ratio became riskier in accordance with those of banks with a minimal deposit ratio. Figure 2 has an illustration of the result for banks with different degrees of deposit ratios (calculated as fractions of total liabilities). Banks that are more reliant on customer deposits were more suffering from negative rates, reaching for higher yields as a result. Since the analysis is founded on security-level data, controlling for all the securities characteristics, these results indicate these banks effectively taking more risk.

The analysis also implies that customer deposits through the same period continued to flow towards banks more reliant on deposits, probably reflecting the actual fact these banks have a business design that caters more for retail depositors and so are perceived to be safer. Simultaneously, however, high-deposit banks didn’t significantly raise the overall amount of loans they offered. Thus, it might be inferred that, over the analysis, high-deposit banks preferred to get the excess deposit inflows in (liquid) securities that are better to readjust than (illiquid) loans. 1

However, it remains to be evaluated which securities banks committed to following the introduction of negative rates. In Bubeck et al. (2020), we utilize the granular database to handle this question. First, the analysis performed for asset classes demonstrates the upsurge in risk-taking was seen for all classes of debt securities (albeit at different degrees of statistical and economic significance). High-deposit banks invested more in riskier debt issued by private financial and non-financial companies. These banks also invested more in riskier securities with longer maturities, adding yet another dimension of risk-taking.

Additionally it is interesting to check out the investment in securities issued in a variety of currencies apart from the euro. This represents yet another channel by which euro area monetary policy spills to other economic areas and currencies. Indeed, the findings of the analysis indicate high-deposit banks directing their investment more towards higher-yielding securities denominated in US dollars, an impact almost twice how big is the estimated effect for euro-denominated securities.

Bank risk-taking in response to lessen interest rates can be linked to bank risk-bearing capacity (Peydró et al. 2017 provide proof this throughout a crisis period by analysing granular data on loans and securities holdings of Italian banks). Indeed, our analysis implies that, following the introduction of negative rates, banks with higher degrees of capital seemed to ‘reach for yield’ more. However, being among the most affected banks (i.e. high-deposit banks), it had been the banks with less capital that displayed a stronger upsurge in the risk degree of their securities portfolios.

While liquid assets such as for example securities are better to rebalance in response to changes in policy rates, the biggest fraction of banks’ assets is represented by loans. While studies predicated on banks’ portfolios of syndicated loans indicate a rise in risk-taking by banks most suffering from negative rates (Heider et al. 2019), analyses predicated on loan portfolios of banks in specific countries have somewhat mixed results. In Bubeck et al. (2020), we offer a complementary analysis predicated on syndicated loans data for his or her sample of large banks. The impact of negative rates on the quantity of loans is somewhat ambiguous, rendering it difficult to draw strong conclusions. As well, banks that are more reliant on retail deposits increased their exposure by lending to riskier borrowers a lot more than other banks. 2 Overall, that is further evidence that high-deposit banks take greater risks following the introduction of negative rates.

Figure 2 Change in the coefficient of securities holdings following the introduction of negative rates

Note: The chart shows the change in the coefficient of securities holdings of large euro area banks as a function of the yield of the security, for just two different values of the deposit ratio. Deposit ratios are calculated as the ratio of customer deposits over total liabilities. ACY may be the adjusted current yield of a security. 3

Conclusions and policy implications

The introduction of negative policy rates (in a number of countries) during the last couple of years is a significant and novel development. Hence, it is crucial to gain an improved knowledge of how negative rates affect financial intermediaries’ incentives to take chances. The analysis reported on in the following paragraphs provides new evidence on the impact of negative rates on the securities investment of the biggest euro area banks and complements the results obtained by other researchers concentrating on lending portfolios. High-deposit banks increase securities holdings following the introduction of a poor policy rate a lot more than low-deposit banks. This increase is most pronounced for assets with higher yields. This ‘search for yield’ behaviour is mainly visible for less capitalised banks and for assets denominated in US dollars. Additionally it is confined to private sector debt securities and is intended for long-term debt, which is typical for ‘search for yield’ behaviour. The analysis complements the data in Heider et al. (2019) which ultimately shows that the banks most suffering from negative rates increased risk-taking through their syndicated loan portfolios. Other studies predicated on granular data on national loan portfolios produce somewhat mixed results (Bottero et al. 2019, Arce et al. 2019).

Overall, these findings claim that negative interest levels have heterogeneous effects across financial intermediaries, leading some to take more risks than others, based on their funding structure. Whether negative interest levels result in more risk-taking over the entire bank operating system, especially considering the ramifications of a prolonged amount of negative rates, can be an important open question that remains to be addressed.


This article first appeared as a study Bulletin of the European Central Bank, in fact it is predicated on a paper entitled “Unconventional Monetary Policy and Funding Liquidity Risk”, by the same authors.. The authors gratefully acknowledge the comments of Philipp Hartmann, Alberto Martin and Louise Sagar. The views expressed listed below are those of the authors and don’t necessarily represent the views of the Deutsche Bundesbank, the European Central Bank or the Eurosystem.


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Ampudia, M and S Van den Heuvel (2018), “Monetary policy and bank equity values in a period of low interest”, ECB Working Paper Series, No 2199.

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1 See Bubeck et al. (2020). This evidence ought to be interpreted remember that the analysis targets the first implementation of negative rates in the euro area. The composition of banks’ assets in a reaction to negative rates and deposit inflows may have changed over an extended time frame.

2 The chance of the borrower is measured by the ratings of the borrower institutions.

3 The adjusted current yield (ACY) of a security is computed as:

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