The European Central Bank published a Working Paper examining how negative reference rates affected bank lending and deposit pricing in Austria, finding a significant reduction in the lending-deposit rate spread after rates moved below zero. The results point to a change in how lending rates co-moved with the 3-month Euribor in the negative-rate environment, alongside constraints on passing negative rates through to household deposits. Using quarterly data for more than 500 Austrian banks from 2009Q1 to 2021Q4, the paper estimates panel cointegration and a vector error correction model linking bank-specific lending and deposit rates with the 3-month Euribor and the ECB Deposit Facility Rate. It frames the negative-rate period around two Austrian Supreme Court rulings, one enforcing a zero lower bound on household savings deposit rates and another requiring negative reference rates to be transmitted into floating-rate loan pricing until the overall lending rate reaches zero. The analysis finds deposit-rate adjustment to Euribor shocks is sluggish, with deposit rates moving back toward equilibrium after around 2 to 3 quarters, and shows that adding the ECB Deposit Facility Rate helps capture a direct effect on lending rates in the negative-rate environment consistent with the influence of targeted longer-term refinancing operations.
European Central Bank 2025-03-18
European Central Bank working paper finds negative reference rates compressed Austrian banks’ lending-deposit spreads
The European Central Bank's Working Paper analyzes negative reference rates' impact on bank lending and deposit pricing in Austria, revealing a significant reduction in the lending-deposit rate spread. Using data from 2009 to 2021, the study highlights changes in lending rates' co-movement with the 3-month Euribor and constraints on passing negative rates to household deposits. It also notes the slow adjustment of deposit rates to Euribor shocks and the ECB Deposit Facility Rate's influence on lending rates.