The Upside Down: French banks under negative policy rates

Using confidential bank-firm level data for France, we show that the introduction of negative rates by the European Central Bank is associated with an expansion in lending by banks with greater reliance on deposits, especially by those with lower capital and larger shares of liquid and households deposits. Consistent with portfolio rebalancing, negative rates appear to also elicit reallocation toward riskier and long-term assets, as banks shrink their share of interbank liquidity and grow that of corporate loans and debts securities. Finally, we document that this behavior generalizes to other countries in the Euro Area. Our result suggest that negative rates encourage banks most reliant on deposits to engage in riskier activities to shield profitability, and confirm that deposits play a key role in the transmission of monetary policy rates below the zero lower bound.