Negative Interest Rate Policy and Bank Profitability: A Comparative Study Between the European Central Bank and the Bank of Japan

This paper discusses salient features of the European Central Bank (ECB) and the Bank of Japan (BoJ) during 2014-2024 by analyzing negative interest rates policies (NIRP) on profitability. We are employing a large sample of 245 European banks and 108 Japanese banks, and utilizing panel data regression and difference-in-differences approach in evaluating the cross-sectional variation of impact from NIRP on bank profitability measures. Our results suggest that although NIRP initially squeezed NIM's, banks adjusted through portfolio re-balancing, fee income diversification and cost efficiency gains. The ECB’s implementation of the tiered system in 2019 was far more cost-effective for banks (in terms of reducing the negative effects on bank profitability) compared with the BoJ uniform application. The results show that larger banks, which have more diversified sources of income, were better able to mitigate the effects of NIRP than smaller deposit-dependent ones. The paper adds to the literature on monetary policy by empirically documenting transmission mechanisms and heterogeneity in the effects of unconventional monetary policies on intermediaries.