Negative rates and bank profit and cost efficiency: evidence for Eurozone

This paper studies the effect of Negative Interest Rates Policies (NIRP) on the performance of Eurozone Banks. To this end, we apply a stochastic frontier analysis (SFA) to a sample of 1446 banks from Eurozone countries for the time period 2010-2018 to explore how bank profit and cost efficiency are affected by NIRP. We find that NIRP has a positive effect on profit efficiency which is mainly attributed to banks' efforts to counterbalance the squeezed interest margins by increasing their non interest income and we also demonstrate that smaller banks and banks facing higher competition are more incentivised to enhance their cost efficiency when they operate under NIRP.