Pushed Past the Limit? How Japanese Banks Reacted to Negative Rates

We investigate how the surprise introduction of negative interest rate policy (NIRP) in Japan affected banks' lending and risk‐taking behavior. Equity prices of Japanese financial firms fell sharply despite the accommodative policy, and we document the characteristics that heighten Japanese ban...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2022-06, Vol.54 (4), p.1027-1063
Main Authors: HONG, GEE HEE, KANDRAC, JOHN
Format: Article
Language:English
Subjects:
bank lending
Interest rates
Monetary policy
negative interest rates
Prices
Profits
Risk behavior
Risk taking
risk taking channel
Side effects
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Summary:We investigate how the surprise introduction of negative interest rate policy (NIRP) in Japan affected banks' lending and risk‐taking behavior. Equity prices of Japanese financial firms fell sharply despite the accommodative policy, and we document the characteristics that heighten Japanese banks' exposure to NIRP. We exploit the cross‐sectional variation in the change of share prices around the announcement to measure banks' differential exposure to NIRP. Consistent with the risk taking channel, we find that more exposed banks insulated their profits from the adverse effects of NIRP by boosting risk‐taking behavior and increasing credit supply relative to less exposed banks.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12843