Why Have Negative Nominal Interest Rates Had Such a Small Effect on Bank Performance? Cross Country Evidence

We explore the effect of negative nominal interest rates on bank profitability and behavior using non‐structural techniques and a cross‐country panel of over 5,200 banks in 27 countries.  Our data set includes annual observations for Japanese and European banks between 2010 and 2017, and covers all advanced economies that have experienced negative nominal rates ‐  including currency union members ‐ as well as both fixed and floating exchange rates countries.  When we compare negative nominal interest rates with low (<1%) positive rates, banks experience losses in interest income that are almost exactly offset by savings on deposit expenses and gains in non‐interest income, such as fees and capital gains on securities.  We find heterogeneous effects of negative rates: banks from regimes with floating exchange rates, small banks, and banks with low deposit ratios drive most of our results.  Low‐deposit banks have enjoyed particularly striking gains in non‐interest income, likely from capital gains on securities.  Banks also responded to negative rates by increasing lending activity and raising the share of deposit funding.  Overall, our results indicate surprisingly benign implications of negative rates for commercial banks thus far.