Effects of a negative interest rate policy in bank profitability and risk taking: evidence from European banks

Abstract

This paper analyses the effect of a negative interest rate policy (NIRP) on profitability and risk taking in the European banking sector and whether this effect is differentiated according to the bank business model. Using a dataset of 2596 banks from 29 European countries over the period 2011–2019 and applying a static modelling approach, we conclude that the implementation of NIRPs lowers the net interest margin and the return on assets of a representative bank by 14.5 basis points and 18.5 basis points, respectively. We also conclude that a decrease in the short-term interest rate lowers the net interest margin when interest rates are already negative. In an environment of negative interest rates, we do not find that European banks take on more risk and conclude that the effects of the implementation of NIRPs influence banks’ profitability and risk taking differently, depending on the business model adopted