Interest Rate Pass‐Through in Mongolia

This study empirically examines the interest rate pass‐through of the money market interest rate to bank lending and bank deposit interest rates in Mongolia using both linear and nonlinear autoregressive distributed lag (ARDL) models. The results from the empirical analysis using data from December 2002 to September 2015 suggest that interest rate pass‐through is generally weaker, slower, and asymmetric in Mongolia. The new findings provide evidence that: (i) interest rate pass‐through has improved over time; (ii) the bank deposit rate has a higher long‐run interest rate pass‐through and slower adjustment than the bank lending rate; and (iii) there is a negative long‐run asymmetric pass‐through with respect to the bank lending rate and a positive long‐run asymmetric pass‐through with respect to the bank deposit rate.     

Explaining Interest Rate Spreads in Ghana*

Abstract: The question of the optimal spread between bank lending rates and rates that banks pay on deposits, which is fair to bankers, depositors and borrowers, has dogged economies for some time. In Ghana, there is widespread perception that the spread is too wide. Bankers, on the other hand justify the spread on the basis of economic variables that affect them. This paper contributes to the literature by identifying, in the case of Ghana, the short‐run response of the net interest margin of banks to changes in bank‐specific, industry‐specific and macroeconomic variables within the broad framework of Ho and Saunders (1981) . We find that increases in the following factors significantly increase net interest margin — bank market power (or concentration), bank size, staff costs, administrative costs, extent of bank risk aversion and the rate of inflation. On the other hand, increases in the following variables decrease net interest margin significantly — bank excess cash reserves, the central bank lending rate, management efficiency and the passage of time. To help reduce interest rate margins, we recommend that banks should not get too big, the central bank should consider lowering the capital adequacy ratio and banks should be required to pass on to borrowers the full extent of reductions or increases in the central bank lending rate. Continued efforts at keeping inflation at bay will also help.     

DYNAMIC EFFECTS OF MONETARY POLICY SHOCKS IN MALAWI

This paper sets out to investigate the process through which monetary policy affects economic activity in Malawi. Using innovation accounting in a structural vector autoregressive model, it is established that monetary authorities in Malawi employ hybrid operating procedures and pursue both price stability and high growth and employment objectives. Two operating targets of monetary policy are identified, viz., bank rate and reserve money, and it is demonstrated that the former is a more effective measure of monetary policy than the latter. The study also illustrates that bank lending, exchange rates and aggregate money supply contain important additional information in the transmission process of monetary policy shocks in Malawi. Furthermore, it is shown that the floatation of the Malawi Kwacha in February 1994 had considerable effects on the country's monetary transmission process. In the post‐1994 period, the role of exchange rates became more conspicuous than before although its impact was weakened, and the importance of aggregate money supply and bank lending in transmitting monetary policy impulses was enhanced. Overall, the monetary transmission process evolved from a weak, blurred process to a somewhat strong, less ambiguous mechanism.     

Spillovers of banking regulation: the effect of the German bank levy on the lending rates of regional banks and their local competitors

During the financial crisis numerous European governments decided to rescue domestic banks with public funds to prevent a collapse of the banking system. To internalize the public costs, bank levies have been introduced in many countries. This paper analyzes the German bank levy which was implemented from 2011 till 2014. We examine not only if banks shift the cost of the levy to their customers’ lending rates, but also whether there are spillovers to their local competitors. The German savings and cooperative banks are a perfect setting to study such effects as they only operate within well-defined regions, allowing us to identify their local competitors. Additionally, only some of them are subject to the levy due to a tax allowance. Firstly, we find that a bank that has to pay the bank levy raises its lending rate by about 0.14 percentage points. Secondly, we examine whether the increased lending rates of paying banks spill over to their local competitors. We find this indirect effect to be about one third of the size. Lastly, adverse effects of the levy on paying banks’ loan supply growth are absorbed by their competitors to a certain extent.     

SOUTH AFRICAN MARKET VOLATILITY,ASYMMETRY AND RETAIL INTEREST RATES PASS‐THROUGH

The purpose of this paper is to examine the interest rate transmission mechanism for South Africa as an emerging economy in a pre‐repo and repo system. It explains how the money market rate is transmitted to the retail interest rates both in the long run and short run, and tests the symmetric and asymmetric interest rate pass‐through using the error‐correction model (ECM) and the adjusted ECM‐exponential generalised autoregressive conditional heteroscedasticity (ECM‐EGARCH) (1,1)‐M methodology. This permitted the examination of the impact of interest rate volatility, along with the leverage effect. An incomplete pass‐through is found in the short run. From the entire sample period, a symmetric adjustment is found in the deposit rate, which had upward rigidity adjustment, while an asymmetric adjustment is found in the lending rate, with a downward rigidity adjustment. All the adjustments supported the collusive pricing arrangements. According to the conditional variance estimation of the ECM‐EGARCH (1,1), negative volatility impact and leverage effect are present and influential only in the symmetric deposit interest rate adjustment process in South Africa.     

Monetary policy transmission through the bank lending channel in Thailand

This paper investigates the strength of the bank lending channel in the transmission of monetary policy in Thailand. Bank behavior is captured by quarterly balance sheet data for ten commercial banks of diverse size for the period 2007-2016. Based on a flexible form profit function, bank supply and demand equations are estimated that capture lending and funding choices. The estimation results are used to derive time-dependent supply and demand elasticities which are then combined with estimates of pass-through from the policy rate to retail rates to simulate the dynamic impact of a monetary tightening on bank portfolio allocations. Due to pass-through differentials among retail interest rates, an increase in the policy rate is shown to raise the cost of loan-production relative to the return on loans, thereby motivating banks to contract their lending. Small banks show a greater degree of loan contraction than large banks because large banks are better able to fund continued lending through debt issuance. Because the Thai economy relies heavily on bank loans, these findings suggest that the bank lending channel is an important conduit for the transmission of monetary policy in Thailand.     

Interest Rate Pass-through in a Dual-track System： Evidence from China

Using the Phillips-Loretan approach, this paper verifies the degree and speed of pass- through and rigidity of different interest rates in China, as well as the response of private loan interest rates to other interest rates during 2002-2012. The results indicate that the long-term pass-through from the interbank offered rates and deposit and loan interest rates to the treasury bond rate is incomplete, but that the long-term pass-through to private loan interest rates is overshooting. The long-term pass-through from the deposit and loan interest rates to the overnight interbank offered rate is incomplete, while that to the interbank offered rates of other maturities is complete. The short-term passthrough and adjustment speed of interest rates exhibit asymmetry. Therefore, before considering a full liberalization of interest rates, it is important to further enhance the competition of the financial system and the function of different interest rate systems, such as the interhank market and bond market.     

INTEREST RATE PASS-THROUGH IN THE COMMON MONETARY AREA OF THE SACU COUNTRIES

We investigate the interest rate pass‐through in the four Common Monetary Area (CMA) countries of the South African Customs Union (SACU). We employ an empirical pass‐through model that allows for thresholds, asymmetric adjustment, and structural changes. We show that CMA bank lending markets exhibit quite some degree of homogenization as the pass‐through is often fast and complete. Deposit markets are somewhat more heterogeneous by showing differing degrees of interest rate stickiness and asymmetric adjustment. Policy makers should therefore be concerned about imperfect competition which may be at the heart of the remaining cross‐country differences in monetary transmission in the CMA.     

The Determinants of Time‐Varying Exchange Rate Pass‐Through in South Africa

The pass‐through of shifts in the rand exchange rate to consumer price inflation has been well documented for South Africa. Although estimates of the absolute level of pass‐through vary, some studies document a decline in pass‐through over time. In order to better illuminate the policy implications of pass‐through, this paper seeks to add to the literature by decomposing pass‐through into a number of time‐varying impulses. This has the advantage of providing deeper insights of pass‐through over time and across various monetary policy regimes. We then analyse the determinants of time‐varying pass‐through. Our results confirm that pass‐through has declined over time but is subject to a stable and low inflation environment. We also show that a volatile exchange rate leads to higher pass‐through.     

Bank Lending and Economic Growth of Chinese Cities

Using a city-level dataset over the period 2004-2006,the present study investigates the relationship between bank lending and the economic growth of Chinese cities.Unlike past studies,we divide bank lending into loans from three types of banks:foreign banks,city banks and other banks.Our findings are threefold.First,the lending of foreign banks exhibits a strong and positive association with the economic growth of Chinese cities. Second,foreign direct investment in the sampled cities enhances the lending effects of foreign banks,but reduces the lending effects of other banks on the economy of Chinese cities.Third, the effects of city competitiveness are similar to those of foreign direct investment;that is,city competitiveness augments the lending effects of foreign banks but reduces the lending effects of other banks.     

The U.S. Postal Savings System and the collapse of building and loan associations during the Great Depression

Building and loan associations (B&Ls) financed over half of new houses constructed in the United States during the 1920s but they lost their predominance within the following decades as they were pushed to convert into Savings and Loans (S&Ls). This study examines whether the U.S. government-insured Postal Savings System attracted funds away from B&Ls precisely when they needed them the most in the Great Depression. Annual town- and county-level data from 1920 through 1935 for three states show that the sudden rise in local postal savings was associated with local downturns in B&Ls. Using a panel vector autoregression, we find that postal savings significantly reduced the amount of money in B&Ls, yet B&Ls had no significant effect on postal savings banks. Alternatively, postal savings had no significant effect on commercial banks. The results suggest that this competitive dynamic prevented B&Ls from rebounding in the mid-1930s and helped contributed to Great Depression's local real estate lending decline.     

Bagehot for beginners: the making of lender‐of‐last‐resort operations in the mid‐nineteenth century1

In this article we develop new tools to survey the development of lending‐of‐last‐resort operations in the mid‐nineteenth century. One finding is that free lending and extensive liquidity support against good collateral developed gradually after 1847, and was already a fact of life before Bagehot published Lombard Street. Another is that the extension of the Bank of England's lender‐of‐last‐resort function went along with a reduction of its exposure to default risks, in contrast with accounts that have associated lending of last resort with moral hazard. Finally, we provide a new interpretation of the ‘high rates’ advocated by Bagehot. We suggest they were meant to prevent banks from free‐riding on the safety offered by the central bank, and were aimed at forcing them to keep lending during crises so as to maintain a critical degree of liquidity in the money market.     

Financial reform and credit extension in Lesotho

The study on which this article is based was concerned with establishing whether the lending behaviour of Lesotho's commercial banks in relation to the private sector has changed following the reforms that have been implemented since 1980. The influence of macroeconomic variables on agricultural credit and on private sector lending provided through the existing commercial banks during the period 1980 to 1993 was examined. The results showed a high and significant association between total credit extension and the general performance of the economy. Macroeconomic variables such as returns on financial securities in Lesotho and bonds in the Republic of South Africa, bank discount rates and the interest rates on saving deposits applicable in Lesotho had a key effect on the extension of credit by commercial banks to the private sector. The study concluded that credit extension activities in Lesotho during the study period were sensitive to the macroeconomic environment.     

Bank Lending and Business Cycles: South African Evidence

Abstract: The paper provides empirical analysis on the linkage between the behavior of bank lending and business cycles in South Africa. Consistent with theory, overall evidence suggesting pro‐cyclicality of bank lending is uncovered both at macro and micro levels. At macro level, bank lending and lending rates have moved in tandem with business cycles. Real borrowing by government was counter‐cyclical to business cycles as would be expected if the role of government was to fine‐tune the economy during booms and recessions. At micro level, bank lending to households and firms was generally pro‐cyclical. Even the growth of provisioning by banks has been largely pro‐cyclical to business cycles, though exceptions were recorded. First, new mortgage lending exhibited counter‐cyclical behavior before 1993. We attributed this behavior to the political and economic climate prevailing then which created uncertainties that made ownership of property a good hedge against economic and political risks. Secondly, the growth of real credit for investment and of foreign trade finance does not appear to have been related to business cycles.     

EXCHANGE RATE PASS‐THROUGH TO IMPORT PRICES IN SOUTH AFRICA: IS THERE ASYMMETRY?1

This paper examines the magnitude and speed of exchange rate pass‐through (ERPT) to import prices in South Africa. It further explores whether the direction and size of changes in the exchange rate have different pass‐through effects on import prices, i.e. whether the exchange rate pass‐through is symmetric or asymmetric. The findings of the study suggest that ERPT in South Africa is incomplete but relatively high. Furthermore, ERPT is found to be higher in periods of rand depreciation than appreciation, which supports the binding quantity constraint theory. There is also evidence to suggest that pass‐through is slightly higher in periods of small changes than large changes in the exchange rate in harmony with the menu cost theory when the invoices are denominated in the exporters' currency.     

Monetary policy transmission and macroeconomic policy coordination in Pacific island countries

During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass‐through and credit growth. Weak credit demand and under‐developed financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks' efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility.     

Exporting National Champions： China＇s Outward Foreign Direct Investment Finance in Comparative Perspective

We examine the extent to which Chinese development banks have financed the globalization of China＇s ＂national champion ＂firms： specifically, through outward foreign direct investment （OFDI）. We create a database of Chinese fnance for OFDI and compare our results to the existing literature and available data on Japan, Korea and other Asian nations. We estimate the total value of China＇s OFDI finance from 2002 to 2012 at US$14Obn. As a percentage of total OFDI, China＇s lending is roughly three times higher than Japan ＇s, the previous global leader in OFDl finance. We identify two major reasons for China＇s high （31 percent） ratio of OFDl lending to total OFDI. First, China has a greater incentive to give OFDI loans than Japan or Korea ever did because its borrowers are statelowned so it can more easily channel funds to targeted areas. Second, China has a greater capacity to give OFDI loans because it has significantly higher savings and foreign exchange reserves than Japan and Korea.     

Heterogeneity in lending and sectoral growth: evidence from German bank-level data

This paper investigates whether heterogeneity across firms and banks matters for the impact of domestic sectoral growth on bank lending. We use several bank-level datasets provided by the Deutsche Bundesbank for the 1996–2002 period. Our results show that firm heterogeneity and bank heterogeneity affect how lending responds to domestic sectoral growth. We document that banks’ total lending to German firms reacts pro-cyclically to domestic sectoral growth, while lending exceeding a threshold of €1.5 million to German and foreign firms does not. Moreover, we document that the response of lending depends on bank characteristics such as the banking groups, the banks’ asset size, and the degree of sectoral specialization. We find that total domestic lending by savings banks and credit cooperatives (including their regional institutions), smaller banks, and banks that are highly specialized in specific sectors responds positively and, in relevant cases, more strongly to domestic sectoral growth.

Monetary Policy Impulses and Retail Interest Rate Pass‐Through in Asian Banking Markets

This paper considers the integration of financial markets and mutual influences of monetary policies in the USA and Asia based on monthly data from 1994 to 2007. We used panel‐type and time‐series and quantile panel‐type error correction models to test the influences of expected and unexpected monetary policy impulses on the interest rate pass‐through mechanism in the financial markets of 9 Asian countries and the USA. The empirics show that if interest rate integration exists in the financial markets, the following effects are observed: (i) positive impulses of unexpected monetary policy will lead to an increase in the long‐run multiplier of the retail interest rate; (ii) the adjustment of retail interest rates with short‐run disequilibrium will lead to an increase in the long‐run markup; and (iii) the empirical results of quantile regression prove that when the interest variation is greater than the 0.5th quantile and unexpected monetary policy impulses are greater than the expected monetary policy impulses, the short‐run interest rate pass‐through mechanism becomes more unstable.     

Bank lending and the business cycle: Does ownership matter in ASEAN countries?

We analyze the lending cyclicality of 213 ASEAN commercial banks over the period 2001–2015. The findings indicate that lending by private banks is procyclical while lending by state banks is countercyclical. Long-term liabilities also move countercyclically for state banks whereas funding for non-state banks in the form of deposit and long-term liabilities is procyclical. Greater lending cyclicality is observed for both private and state banks in Cambodia, Myanmar, Laos, and Vietnam (CMLV) compared to Indonesia, Malaysia, the Philippines, Thailand, and Singapore (ASEAN-5). Lending of non-ASEAN based foreign banks shows greater procyclicality than that of domestic banks for the ASEAN-5 countries, although not for the CMLV countries. During the global financial crisis, lending by non-ASEAN based foreign banks contracted sharply even as lending by ASEAN based foreign banks was unaffected. Overall, our results confirm that bank ownership influences lending and funding sensitivity to economic fluctuations.