The Welfare Implications of the Negative Interest Rate Environment
Authors: Zorka Simon (Goethe University)
Title: The Welfare Implications of the Negative Interest Rate Environment: The Cost and Benefits of the Oligopolistic Securities Lending Market
Abstract: In the last decade, central bank interventions and the subsequent low interest rates might have depressed yields on safe sovereign bonds to the point that unintentionally hurt the wealth preservation of the average European citizen. The exceptionally high demand for high quality liquid assets (HQLA), such as German treasuries, drove up the demand not only in the open market but also in the securities lending market. However, the additional lending income is insufficient to offset the loss in real income, especially for the less connected lenders with low bargaining power (Duffie, Gârleanu, and Pedersen, 2005). We show that in the non-transparent, oligopolistic securities lending market for treasuries, the price dynamics are inefficient, despite the outstandingly high utilization rate. Especially for longer maturities, where lenders are passive investors, such as pension funds and insurance firms, reactions to changes in supply and demand are delayed, moreover lending income is unlikely to provide significant additional revenue in the current market setting.