Implications of negative interest rates for the net interest margin and lending of euro area banks

BIS Working Papers  |  No 848  | 
18 March 2020


A bank's net interest rate margin (NIM) is the difference between the interest it receives on its assets and the interest it pays on its liabilities, divided by the amount of its interest-bearing assets. In general, a decreasing level of market interest rates compresses the NIM. But does the effect of a change in the interest rate on the NIM also depend on whether the interest rate level is negative instead of low and positive? And what is the impact of a shrinking NIM on lending?


Using two proprietary bank-level data sets, I analyse the impact of the negative interest rate policy (NIRP) in the euro area on banks' NIM. I then investigate the effect of the NIM on new lending. Furthermore, as a stronger impact of negative rates on the NIM could result from an effective zero lower bound in banks' retail deposit rates, the NIM is decomposed into the lending and deposit rates.


I find that the short-term market rate is positively related to euro area banks' NIM, but only up to an interest rate level of about 2%. Its impact increases with declining interest rates. The difference between negative interest rates and low but positive interest rates is not only statistically significant but also economically relevant. In particular, at negative market rates, a 1 percentage point decrease in the short-term interest rate implies a reduction in the monthly NIM by 3.2% relative to the sample mean, compared with 1.2% at low but positive rates. The pushing factor behind the increasing impact at negative market rates is the stronger reaction of the lending rate compared with the virtually unchanged reaction of the deposit rate. Considering the entire sample period, a falling NIM has a negative effect on new lending. However, for the period of negative rates, this effect cannot be confirmed empirically.


This paper explores the impact of low (but) positive and negative market interest rates on euro area banks' net interest margin (NIM) and its components, retail lending and retail deposit rates. Using two proprietary bank-level data sets, I find a positive impact of the level of the short-term rate on the NIM, which increases substantially at negative market rates. As low profitability could hamper the ability of banks to expand lending, I also investigate the impact of the NIM on new lending to the non-financial private sector. In general, the NIM is positively related to lending: When lending is less profitable, banks cut lending. However, at negative rates this effect vanishes. This finding suggests that banks adjusted their business practices when servicing new loans, thereby contributing to higher new lending in the euro area since 2014.

JEL classification: G21, E43, E52.

Keywords: net interest margin, monetary policy, negative interest rates, bank pro tability, lending.