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We show that negative interest rate policy (NIRP) has expansionary effects on bank credit supply—and the real economy—through a portfolio rebalancing channel, and that, by shifting down and flattening the yield curve, NIRP differs from rate cuts just above the zero lower bound. For identification, we exploit ECB’s NIRP and matched administrative datasets—including the credit register—from Italy, severely hit by the Eurozone crisis. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets. NIRP-affected banks rebalance their portfolios from liquid assets to lending, especially to ex-ante riskier and smaller firms—without higher ex-post delinquencies—and cut loan rates (even to the same firm), inducing sizable firm-level real effects. By contrast, there is no evidence of a retail deposits channel associated with NIRP.

We study negative interest rate policy (NIRP) exploiting ECB’s NIRP introduction and administrative data from Italy, severely hit by the Eurozone crisis. NIRP has expansionary effects on credit supply—and hence the real economy—through a portfolio rebalancing channel. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets, not with higher retail deposits. NIRP-affected banks rebalance their portfolios from liquid assets to credit—especially to riskier and smaller firms—and cut loan rates, inducing sizable real effects. By shifting the entire yield curve downwards, NIRP differs from rate cuts just above the ZLB. Camelia Minoiu is grateful to the Wharton Financial Institutions Center and the Management Department at the University of Pennsylvania for their hosting during the development of this research project. José-Luis Peydró acknowledges financial support from ECO2015-68182-P (MINECO/FEDER, UE) and from the European Research Council Grant (project 648398).

We study the role of the bank-lending channel in propagating fluctuations in commodity prices to credit aggregates and economic activity in developing countries. We use data on more than 1,600 banks from 78 developing countries to analyze the transmission of changes in international commodity prices to domestic bank lending. Identification relies on a bankspecific time-varying measure of bank sensitivity to changes in commodity prices, based on daily data on bank stock prices. We find that a fall in commodity prices reduces bank lending, although this effect is confined to low-income countries and driven by commodity price busts. Banks with relatively lower deposits and poor asset quality transmit commodity price changes to lending more aggressively, supporting the hypothesis that the overall credit response to commodity prices works also through the credit supply channel. Our results also show that there is no significant difference in the behavior of foreign and domestic banks in the transmission process, reflecting the regional footprint of foreign banks in developing countries.