The dynamics of bank rates in a negative-rate environment - the Swiss case

Dr. Romain Baeriswyl, Dr. Lucas Marc Fuhrer, Dr. Petra Gerlach and Dr. Jörn Tenhofen



JEL classification
E43, E52, G21

Interest rate pass-through, mortgages, monetary policy


This paper documents the change in banks' interest rate setting behaviour in a negative-rate environment. In a positive-rate environment, the pricing of mortgages and deposits follows the dynamics of capital market rates for comparable maturities. When capital market rates fall below zero, the dynamic of mortgage and deposit rates changes. Because deposit rates tend to be sticky at zero and do not fall with short-term capital market rates into negative territory, banks' liability margin shrinks. In an attempt to preserve their overall interest margin, banks raise long-term mortgage rates in response to a decline in short-term capital market rates, while they continue to decrease long-term mortgage rates when long-term market rates fall. Overall, our results imply that a policy rate cut reduces bank rates less in a negative-rate environment than in a positive-rate environment.