<abstract xmlns="http://www.w3.org/1999/xhtml"><p>Since the ECB has lowered the interest rate on deposits into negative territory, more and more commercial banks are also passing on this negative interest rate to their customers. The main aim of this paper is to answer the question under which conditions the commercial banking sector will be more or less reluctant to pass the negative deposit rate on to its private customers. We first clarify the circumstances under which demand deposits and excess liquidity arise, and what role quantitative easing plays in this context. Within a game-theoretical framework, it is derived that the pressure to pass on the negative interest rate is particularly high if there are no switching costs, and the banking market follows a Bertrand competition.</p></abstract>

Since the ECB has lowered the interest rate on deposits into negative territory, more and more commercial banks are also passing on this negative interest rate to their customers. The main aim of this paper is to answer the question under which conditions the commercial banking sector will be more or less reluctant to pass the negative deposit rate on to its private customers. We first clarify the circumstances under which demand deposits and excess liquidity arise, and what role quantitative easing plays in this context. Within a game-theoretical framework, it is derived that the pressure to pass on the negative interest rate is particularly high if there are no switching costs, and the banking market follows a Bertrand competition.

Passing on negative interest rates

International Journal of Management and Economics

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

{"article-title":"Passing on negative interest rates"}

Since the ECB has lowered the interest rate on deposits into negative territory, more and more commercial banks are also passing on this negative interest rate...

		Bank B

		Active	Passive
Bank A	Active	1,000/1,000	1,000/1,000
Bank A	Passive	1,000/1,000	1,000/1,000

Assets	Liabilities
Credit (Household 1) 1,000	Demand Deposit (Household 1) 900
Minimum reserves 9	RCK 109

		Bank B

		Active	Passive
Bank A	Active	0/0	0/−5
Bank A	Passive	−5/0	−5/−5

Assets	Liabilities
Credit (Household 2) 1,000	Demand Deposit (Household 2) 900
Minimum Reserves 9	RCK 109

		Bank B

		Active	Passive
Bank A	Active	1,500/500	0/2,000
	Active	(0/0)	(0/−10)
	Passive	2,000/0	1,500/500
	Passive	(−10/0)	(−7.5/−2.5)

Passing on negative interest rates

Article Category: Conceptual Paper

Published Online: Dec 04, 2020

Page range: 283 - 290

Received: Feb 06, 2020

Accepted: Aug 25, 2020

DOI: https://doi.org/10.2478/ijme-2020-0022

Keywords
excess liquidity, penalty interest, game theory, investor behavior

© 2020 Georg Stadtmann et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Figure 1

Deposits with Bank A or Bank B (figures in €)

j.ijme-2020-0022.tab.006.w2aab3b7b2b1b6b1ab1b1b5Aa

Pay-off matrix for Bank A or Bank B (figures in €)

j.ijme-2020-0022.tab.007.w2aab3b7b2b1b6b1ab1b1b9Aa

Asymmetry scenario (figures in €)

Passing on negative interest rates

Article Category: Conceptual Paper

Published Online: Dec 04, 2020

Page range: 283 - 290

Received: Feb 06, 2020

Accepted: Aug 25, 2020

DOI: https://doi.org/10.2478/ijme-2020-0022

Keywordsexcess liquidity, penalty interest, game theory, investor behavior

© 2020 Georg Stadtmann et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Figure 1

Deposits with Bank A or Bank B (figures in €)

j.ijme-2020-0022.tab.006.w2aab3b7b2b1b6b1ab1b1b5Aa

Pay-off matrix for Bank A or Bank B (figures in €)

j.ijme-2020-0022.tab.007.w2aab3b7b2b1b6b1ab1b1b9Aa

Asymmetry scenario (figures in €)

Keywords
excess liquidity, penalty interest, game theory, investor behavior