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Due to fears of recession and evidence of weak inflation, central banks returned to an expansionary monetary track in 2019. In light of this, debate has centred around the adverse impact of prolonged, low interest rates on banks’ margins. For instance, Spain’s six largest banks posted earnings in the first half of 2019 that were down 11% from the same period in 2018. While the ECB lowered its deposit rate an additional 10 basis points further into negative territory in September 2019, the central bank also introduced a tiered-deposit rate with the goal of offsetting the pressure on banks’ margins. However, this provides only partial support for bank profitability. Looking at the empirical evidence, it becomes clear that while asset non-performance improves when rates fall, the effect on net interest margins is greater, thereby reducing a bank’s profitability. Negative rates can even have the opposite effect on stimulating credit than the one intended due to their influence on markets’ expectations. More broadly, negative rates can distort yield curves, exacerbating debt accumulation and potentially impacting financial stability. Finally, they can impact exchange rates, which warrants careful consideration in the context of today’s trade tensions.

Carbó, S., P. J. Cuadros y F. Rodríguez (2019). «Bank profitability in the new monetary paradigm». SEFO – Spanish Economic and Financial Outlook 8, n.º 5 (mayo): 21-28.