of retail deposits is the core factor behind the specialness of negative policy rates for banks. therefore, the share of retail deposits in a bank ’ s funding is the first relevant variable to assess. indeed, some analyses show that, when rates are at zero or below, new rate cuts will weigh more on banks ’ stock prices [ 1 ] and on their lending volumes [ 2 ] if banks are more funded through retail deposits. to be clear : this does not mean that our negative rate has had a general tightening effect. rather, we have all indication of the opposite : bank lending rates have decreased and lending has accelerated over the last three years. but it indicates that the rigidity of the cost of deposits can make cuts in negative territory less expansionary than when rates stay above zero. on the asset side, interest risk exposure works in the opposite direction : the smaller or slower the adjustment of interest income to the new rate cut, the more positive the impact on bank profitability. a longer average maturity of marketable assets implies bigger capital gains for banks. long - term fixed - rate loans allow the bank to benefit from higher net interest income until the full repayment, although loan renegotiations may limit the additional benefits. in contrast, more variable - rate or short - term loans entail a faster fall in interest income. thus, the net impact of negative rates on profitability will be different for different banks. those most reliant on deposits, providing short - term lending and holding fewer marketable assets might be the most affected. many cooperative banks may fit in this description. yet, the final impact on aggregate credit supply will depend on still other characteristics : banks with higher initial capital or margin to lower costs will be able to weather the temporary compression on profits and to better transmit the easier financial conditions to the economy. other measures implemented by the ecb over the last few years may have also offset the potential hampering impact of negative rates. the targeted ltros, for instance, have contributed to lowering the cost of funding for banks. our forward guidance on policy rates and our asset purchase programmes have increased the value of assets held by banks and to accelerate the recovery. in sum, they help to create the conditions which will allow us to normalise interest rates again. [ 1 ] ampudia and van den heuvel, 2017. [ 2 ] heider, saidi and schepens, 2017 ; de sola perea and kasongo kasham

a rational reaction for many households. in the euro area, household deposits account for one fifth of banks ’ liabilities on average. thus, a large withdrawal of retail deposits could be very problematic for banks, as they could become underfunded and more dependent on less stable financing. hence, banks have a strong interest in keeping retail deposit rates positive, even when other funding costs drop : in practice there is a zero lower bound for retail rates, so when policy rates become negative, the cost of part of the bank ’ s funding does not go down. however, after the drop in policy rates, interest revenues on assets do decrease : variable rate loans adjust to market rates, and the maturing portfolio will be replaced with assets yielding less. thus, banks ’ net interest income starts to fall. of course, banks can try to limit the impact on profitability, by taking on more risk, or getting cheaper, but less stable, funding. however, this could make them more fragile. to limit the fall in their interest income, banks could reduce lending rates to a lesser degree than with a “ normal ” interest rate reduction. of course, this would hamper the monetary transmission to the real economy. that is the opposite of what we want. fortunately, this is not the whole story, as other channels can offset this adverse impact of negative rates. when policy rates are lowered, fixed - rate marketable assets held by banks gain in value. this boosts banks ’ economic capital at the moment of the rate cut. banks also benefit from the improvement in the economy that follows the rate cut : the quality of the lending book improves, borrower risk goes down, and the demand for loans increases. in addition, variable rate loans become more affordable after a rate cut. while this reduces banks ’ interest income, it also makes repayments cheaper and should lower default rates. banks ’ characteristics matter thus, the ultimate impact of negative rates on bank profits and credit supply is difficult to estimate. not all banks would be affected to the same extent by the negative rates. the impact of negative rates on banks ’ profits will depend on the composition of their balance sheets and, more generally, on their business model. the channels through which profitability is affected – the share of retail deposits, scope for valuation gains and maturity of the loan book – can provide an indication of the direction and the extent of the effect on each bank. 3 / 5 bis central bankers'speeches the lower bound in the remuneration