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The paper finds that banks with a higher ratio of retail overnight deposits over total assets tend to charge higher interest rates on fixed rate mortgages originated after the introduction of negative deposit facility rates. At the same time, the paper finds no evidence of significant differences in interest rate-setting behaviour for adjustable rate mortgages across banks with different overnight deposit ratios. This divergence between fixed-rate and adjustable-rate mortgages is consistent with the perspective that banks would be more reluctant to transmit negative deposit facility rates to assets (i.e. mortgages) in which their future income is fixed (i.e. ‘locked in’) than to similar assets where income can adjust based on market conditions (i.e. adjustable-rate mortgages). In addition, there is evidence to suggest that banks with a higher overnight deposit ratio are more likely to originate adjustable rather than fixed rate mortgages after policy rates turn negative.
The paper takes the novel approach of specifically focusing on overnight deposits, in contrast to total deposits, in the presence of negative deposit facility rates. This is because overnight deposits carry rates that are the closest to zero and, therefore, are least likely to be reduced relative to the rates paid out on the various deposit types offered (i.e. overnight, savings, and time deposits). In this way, banks with a greater share of overnight deposits may find their net interest income ‘squeezed’ once negative deposit facility rates are introduced— lending rates may fall in line with the rate cut but overnight deposit rates may not necessarily follow. In contrast, banks whose assets are funded with other types of deposits (or other liabilities) paying out higher rates have greater freedom to pass through the deposit facility rate cut, thus minimizing pressure on net interest income. These divergences in exposure to the deposit facility rate cut (i.e. net interest income pressure) lead banks to behave differently when setting interest rates on fixed rate mortgages, even after taking into account other borrower, loan, and bank features that could play a role.
As regards the aggregate economic implications of these empirical findings, the paper shows that while the additional charges on new fixed rate mortgages may not be trivial for a few individual households, they are relatively small for the household sector overall. This suggests that concerns about modestly-negative deposit rates impairing the transmission of monetary policy may be less relevant than previously believed.