negative relation between economic growth rates and non - performing loans. 18 these positive effects are present at all rate levels and are likely to dominate when rates are moderately negative. also, the economic lower bound is not uniquely determined at the aggregate level, since it will vary across banks and markets. the larger the share of floating - rate lending in the stock of loans, the faster the negative impact on interest margins will be. banks with large fixedincome holdings and holdings of bonds which benefited the most from spread compression will be better able to offset decreases in interest margins, due to the revaluation effect i mentioned earlier. the reversal rate is also likely to be lower for those banks that are more reliant on wholesale rather than retail funding. market - based funding suffers less from this zero lower bound, meaning that these banks will be better able to protect their interest margin. similarly, banks with greater market power will be better able to avoid passing on the lower rates to borrowers, which will shield their interest margin. in the euro area, this translates into geographic differences based on national banking structures, implying that the negative interest rate policy has distributional consequences across banks located in different jurisdictions. the second important question for central bankers is whether the persistence of low and / or negative interest rates poses other challenges to the stability of the financial system. challenges to financial stability could potentially materialise if banks were to increase their exposure to lower quality counterparties in order to boost returns. 19 this could reflect a portfolio rebalancing towards riskier assets when yields on safe assets are low, or a greater concentration of lending to small and medium - sized enterprises ( smes ), which generate higher returns but have historically exhibited higher default risk. the effect is similar to the “ search for yield ” by managers targeting a minimum return on assets. 20 note that this mechanism may as well apply to shadow banks insofar as they rely on short - term funding. financial stability risks could also materialise outside of banks, through excessively inflated financial asset prices and if zero or negative rates encourage asset price volatility. existing empirical evidence, mainly relying on periods with low, but positive rates before the global financial crisis, indicates that periods of lower interest rates are indeed associated with see adrian, t., and h. s. shin ( 2011 ), “ financial intermediaries and monetary economics ”, in b. friedman and m. woodford ( eds. ), handbook of monetary economics, volume 3,

treatment of negative interest rate income, which is often not symmetric with the treatment of positive interest rate income. in addition, some it systems may not be able to cope with negative rates. in the euro area, however, these scenarios have not yet materialised. thanks to intensive technical cooperation between the ecb and market participants ahead of the introduction of negative rates, our experience has been very smooth, allowing large parts of the government bond and secured and unsecured money markets to operate at negative rates without any disruption. 13 the introduction of negative rates has been smooth also in other jurisdictions outside of the euro area. 14 on money illusion, see shafir e., p. diamond and a. tversky, “ money illusion ”, the quarterly journal of economics, vol. 112, issue 2, 1997, pp. 341 – 374. on the interaction between negative rates and money illusion, see borio c. and a. zabai, 2016 “ unconventional monetary policies : a re - appraisal ”, bis working paper no 570, 2016. “ imagine a world in which tax offices harry people who file their returns promptly ; where big supermarket chains pay their suppliers before the goods fly off the shelves and not months afterwards ; and where a prepaid annual gym membership is more costly than paying month by month. it sounds fanciful, absurd even. ”, in the economist, op. cit. see deutsche bundesbank, “ nothing new about real interest rates on deposits ”, 30 june 2014, https : / / www. bundesbank. de / redaktion / en / topics / 2014 / 2014 _ 06 _ 30 _ nothing _ new _ negative _ interest _ rates. ht ml. see european central bank, “ low interest rates and households net interest income ”, ecb economic bulletin, issue 4 / 2016, box 3. see mcandrews j., “ negative nominal central bank policy rates : where is the lower bound? ”, remarks at the university of wisconsin, 8 may 2015. for example, some financial contracts ( e. g. money market funds or floating rate notes ) may not foresee the possibility of payments from the lender to the borrower and in any case the logistics of collecting interest payments from holders of securities can be complex. see cœure b., “ life below zero : learning about negative interest rates ”, presentation at the annual dinner of the ecb ’ s money market contact group,