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

38 Pages Posted: 31 May 2017 Last revised: 28 Jun 2018

See all articles by Miguel Ampudia

Miguel Ampudia

European Central Bank (ECB) - Directorate General Research

Skander Van den Heuvel

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2018

Abstract

This paper examines the effects of monetary policy on the equity values of European banks. We identify monetary policy shocks by looking at changes in the EONIA one month and two year swap contracts yield during narrow windows around the press statements and press conferences announcing monetary policy actions taken by the Eurosystem’s Governing Council. We find that an unexpected decrease of 100 basis points on the short-term policy rate increases banks’ stock prices by 3.9% on average. These effects vary substantially over time; in particular, they were stronger during the crisis period and reversed during the recent period with low and even negative interest rates. That is, with rates close to or below zero, further interest rate cuts became detrimental for banks’ equity values. The composition of banks’ balance sheets is important in order to understand these effects. In particular, the change in sensitivity to interest rate surprises as rates drop to low and negative levels is much more pronounced for banks with a high reliance on deposit funding, compared to other banks. We argue that this pattern can be explained by a reluctance of banks to pay negative interest rates on retail deposits.

Keywords: monetary policy, negative rates, bank profitability, ECB

JEL Classification: E52, E58, G21

Suggested Citation

Ampudia, Miguel and Van den Heuvel, Skander, Monetary Policy and Bank Equity Values in a Time of Low Interest Rates (May 1, 2018). Available at SSRN: https://ssrn.com/abstract=2976372 or http://dx.doi.org/10.2139/ssrn.2976372

Miguel Ampudia (Contact Author)

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Skander Van den Heuvel

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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