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Negative-interest-rate policies proving counterproductive, research finds

Negative-interest-rate policies are proving counter-effective, resulting in deteriorating banking profits, stifled loan growth and tightened bank margins, according to research from the University of Bath.

The purpose of using negative interest rates is to boost the domestic economy by stimulating demand for bank loans, the research said, noting that such policies are having "unintended" outcomes.

"Our study shows negative interest rate policy has backfired, particularly in an environment where banks are already struggling with profitability, slow economic recovery, historically high levels of non-performing loans, and a post banking-crisis deleveraging phase," said Ru Xie, one of the researchers.

Bank profits are due to slide if loan growth is restricted and bank margins are squeezed owing to low long-term yields, Xie said. The resulting deterioration in bank capital bases, and thereby more-limited credit growth, limits any positive effects of negative-interest-rate policies on domestic demand, Xie added.

Bank lending, margins and profitability were worse in countries that adhered to negative-interest-rate policies compared with those that did not adopt such policies, according to evidence identified by the researchers.

In addition, Xie noted that negative interest rates offset the stimulus effect brought about by other unconventional types of central bank policies such as quantitative easing.

Japan and certain European countries have adopted negative-interest-rate policies, making it more expensive for commercial banks to retain excess reserves with central banks. A number of major European banks recently declared their plans to transfer negative interest rates to companies and wealthy individuals.