2016c). Moreover, the maturity of the debt held by these funds has not changed dramatically under NIRP, suggesting that they have not altered significantly their business model and weathered the low interest rate environment relatively well.

Potential disruptions to the functioning of money markets are likely to be an important reason why NIRP are not seen as a preferred policy option in the United States.<sup>26</sup> In particular, U.S. money market funds operate under rules that make it difficult for them to pay negative interest rates. These funds are usually considered to be a more important component of the financial system in the United States in comparison with Europe.<sup>27</sup> A study by the Federal Reserve explores the market implications of low, zero, and modestly negative rates on excess reserves (Federal Reserve Board 2010). It concludes that reducing interest rates on excess reserves (IOER) to close-to-zero levels would trigger outflows from money market funds. Reducing the IOER to zero would accelerate the outflows and lead to revenue losses for Treasury-focused funds. Setting the IOER modestly below zero would imply further reductions in profitability of money market funds and increase the probability that some of them would become unviable. In addition, the auction process for new U.S. Treasury securities does not currently permit participants to submit bids with negative rates, adding to the operational difficulties in implementing NIRP.

# **5.2. Changes in financial-sector variables following NIRP: An event study**

An event study is conducted to examine the changes in key financial-sector variables following the announcements of NIRP. As in section 4.4, the “event” is defined as a deposit policy rate cut announcement into (or within) negative territory, using a one-day event window around the announcement. The same caveats above apply to the interpretation of these event study results.

Despite the presumption of adverse effects, the initial reaction of bank equity prices to NIRP announcements has been mixed, while financial sector Credit Default Swap (CDS) spreads have generally declined (Figure 13). The average change in bank equity prices was negligible on the

> 26 In both the U.S. and U.K., there have been discussions about the possible use of NIRP. For instance, Mankiw (2009) argued that the U.S. Federal Reserve should have considered this possibility during the Great Recession. Bernanke (2016a) and Kocherlakota (2016b) suggested that that the use of negative interest rate policies could be appropriate in the United States under certain circumstances. The BoE also discussed the feasibility of negative policy rates in an official letter to the Treasury Committee noting (Bank of England 2013): _“... there are no significant technical or operational obstacles that would prevent the Bank from implementing a negative level of Bank Rate.”_ However, Governor Mark Carney (2016a) was cautious about the use of NIPR because of financial stability considerations: _“... As we have seen elsewhere, if interest rates are too low (or negative), the hit to bank profitability could perversely reduce credit availability or even increase its overall price.”_ Carney (2016b) repeated the same message: _"The MPC is very clear that ‘lower bound' is a positive number and we will continue to be clear on that... I am not a fan of negative rates. We see the negative consequences through the financial system in other jurisdictions. We have other options available if more stimulus is needed.”_

> 27 Cœuré (2015), for instance, states _“This is [evidence that the lower interest rate environment in the United States adversely affects money market funds], however, less of a concern in Europe where money market funds are not central to the financial system.”_

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