The Adverse Side-Effects of Negative Interest Rate Policies on Banking Stability

Sammanfattning: The purpose of this paper is to investigate banking stability in countries where Negative Interest Rate Policies (NIRPs) are implemented, then study this stability by examining the relationships between policy interest rates and indicators of not only banking profitability but also capital adequacy, asset quality, and liquidity. The dataset used are the Financial Soundness Indicators (FSIs) collected by the IMF, which are mainly used for measuring the economic stability among countries. A different panel regression is applied for each indicator, which includes policy interest rates as explanatory variables, and inflation and GDP growth rates as control variables. There are several statistical techniques which are implemented in this paper; however, a Two-Stage Least Squares (2SLS) regression is applied as a main method to estimate coefficients. Generally, this paper has shown some evidence that NIRPs have adverse side-effects on banking stability. Banking capital adequacy level and profitability both have a same trend with negative policy interest rate, in which under NIRP, capital adequacy and profitability levels are deteriorated.