The effectiveness of negative interest rates as a monetary policy tool depends importantly on the response of the banking sector. This paper offers unique new insights for U.S. banks by using supervisory data to examine bank-level expectations regarding the impact of negative rates on profitability through net interest margins. The main results show that the largest U.S. banks differ significantly in how they respond to negative interest rates. The most significant channel of adverse exposure

more »

... mes from the pass-through of the negative policy rate to interest rates on short-term liquid assets held on the balance sheet. At the same time, on the liability side, banks that rely more heavily on short-term wholesale funding, including financing through the repo market, may benefit through a reduction in funding costs. In the aggregate, these effects likely wash out as liquidity provision is sufficiently well diversified across the banking sector as a whole.