The development of bank profitability in Denmark, Sweden and Switzerland during a period of ultra-low and negative interest rates

Abstract

In June 2014, the ECB decided to lower its interest rate on the deposit facility for the first time to below zero with the aim of countering deflation risks. Negative central bank interest rates have no precedent in history and thus raise questions about potential unintended side effects on the economy and the banking system. To evaluate the risks of such side effects, we investigate the development of bank profitability in three European countries that look back on more than one year of negative interest rates: Denmark, Sweden and Switzerland. Overall we conclude that in these countries, negative interest rates have so far not resulted in a significant reduction of bank profitability and particularly of net interest income. Declines in interest income have been more than compensated for by declines in interest expenses. Most fears about unintended consequences of negative interest rates, such as a rush to cash or a reduction of credit supply, have so far not materialized.