Abstract:
We analyze the impact of negative reference rates on the interest behavior of more than 500 Austrian banks from 2009Q1 to 2021Q4. Using panel vector error correction analysis with the Engle-Granger procedure in two steps, we establish a cointegration vector that links bank-specific lending rates, deposit rates, the 3-month Euribor, and the ECB Deposit Facility Rate. We propose two hypotheses to evaluate the effects of negative 3-month Euribor on this vector. Firstly, we explore how an Austrian Supreme Court decision enforcing a zero-lower bound on household deposits could decrease the lending-deposit rate spread. Secondly, we examine the emergence of two "true prices" for loans and deposits due to the negative 3-month Euribor. This is linked to an Austrian Supreme Court decision mandating the transmission of negative reference rates to bank-specific lending rates, potentially affecting cointegration with the 3-month Euribor. Our findings show a significant spread reduction after the introduction of negative reference rates, primarily driven by changes in the cointegration relationship between bank-specific lending rates and the 3-month Euribor. Additionally, by including the ECB Deposit Facility in our cointegration model, we capture the direct impact of the Targeted Long-term Refinancing Operations on the lending rate.