Monetary Policy and Bank Equity Values in a Time of Low and Negative Interest Rates

Board of Governors of the Federal Reserve System (U.S.), Miguel Ampudia, Skander J. Van den Heuvel, European Central Bank, Board of Governors of the Federal Reserve System (U.S.)
2019 Finance and Economics Discussion Series  
Does banks' exposure to interest rate risk change when interest rates are very low or even negative? Using a high-frequency event study methodology and intraday data, we find that the effect of surprise interest rate cuts announced by the ECB on European bank equity values -an effect that is normally positive -has become negative since interest rates in the euro area reached zero and below. Since then, a further unexpected cut of 25 basis points in the short-term policy rate lowered banks'
more » ... prices by about 2% on average, compared to a 1% increase in normal times. In the cross section, this 'reversal' was far more pronounced for banks with a more traditional, deposit-intensive funding mix. We argue that the reversal as well as its cross-sectional pattern can be explained by the zero lower bound on interest rates on retail deposits. JEL-codes: G21, E52, E58
doi:10.17016/feds.2019.064 fatcat:j3og272vb5ebriorly4q4n46b4