Monetary policy, geography and the activity of localized banks’ branches under negative rates

Negative Interest Rate Policies (NIRPs) were implemented by the Danish (2012), European (2014), Swiss (2015), Swedish (2015) , and Japanese (2016) central banks. They are part of the panoply of unconventional monetary policies that were adopted in many advanced economies in the wake of the 2007-2008 global financial crisis and the ensuing recession. While the transmission of monetary policy to lending rates has proved to be effective under NIRP, greater risk-taking, notably by banks, has been observed in those economies, raising concerns for financial stability. In the Euro area, banks have reacted to the compression in their margins by expanding their lending activity. The increase in credit supply, however, was uneven across banks and was generally accompanied by greater risk-taking. Heider et al. [2019] for example shows that banks reliant on deposit financing increased their lending significantly less than low-deposit firms and took more risk in lending to riskier firms.