Heterogeneous Banking System Under a Negative Interest Rate Policy

Abstract

This paper examines the impact of negative interest rate policy on banking concentration in Japan from 1999 to 2022. I calculate credit and deposit mark-ups to show that there was a structural shift in banks’ market power in 2016, and I document that the Japanese economy features different transmission channels for negative interest rate policy compared to the European economy as studied in the empirical literature. Over the period of negative interest rate policy considered, the five largest Japanese banks increased their interest expenses on deposits and decreased deposit mark-ups, while the five median banks displayed the opposite dynamics. This heterogeneous response reflects an increase in interest expenses from higher US dollar funding rates together with the additional issuance of bonds. My findings suggest that the negative interest rate policy decreased banking concentration in Japan.