Second, a proper assessment of the overall contribution of the negative deposit rate facility to the policy package should be comprehensive in nature.7 An important component in this assessment is the impact of the negative deposit rate on the health of the banking system, especially in view of the feedback mechanism by which the current level of bank profitability may influence future credit growth through its impact on bank capital, both directly and indirectly through any impact on the market equity value of banks.
Of course, those banks that hold excess reserves face a direct cost from the negative deposit rate. In addition, to the extent that banks cannot pass through the lower rate to all types of depositors, the net interest margin of banks is also compromised if competitive pressures mean that lending rates fall by more than deposit rates.