Monetary and banking policy transmission through interest rates: an empirical application to the USA,Canada, the UK and the Eurozone

The main purpose of this paper is an examination of the pass‐through interest rate transmission from the wholesale rates (central bank and/or money market rates) to the retail rates (deposit and lending rates) of the banking system. Knowledge of the transmission substantially helps us to calculate the pass‐through interest rate margin or mark‐up in the banking systems under examination (USA, Canada, the UK and the Eurozone). The selection of the wholesale interest rate is also an important part of this pass‐through transmission framework because it is related to the money supply process and therefore the central bank's policy capabilities. In the empirical part, a Johansen (1988) cointegration based error‐correction procedure (ECM‐GE) is implemented for the wholesale interest rate selection. Then an LSE–Hendry general‐to‐specific model (GETS) is applied, for the revelation of the banking sector pass‐through interest rate behaviour. In the empirical part, on the issue of the wholesale interest rate selection, the USA and the Eurozone seem to favour the Money Market rate while the UK and Canada favour the central bank policy rate. The results indicate two types of interest rate pass‐through behaviour, with market structure implication – namely, the US and UK banking systems contrasted with Canada–Eurozone.     

The transmission of bank capital requirements and monetary policy to bank lending in Germany

We investigate the transmission of changes in bank capital requirements and monetary policy, and their interaction, on German banks’ corporate loan growth and lending rates. Our results show that increases in capital requirements are associated with an immediate decrease in total domestic and cross‐border bank lending. Changes in the euro area's monetary policy stance are positively related to corporate loan interest rates in general. Regarding the interacting effect of national bank capital requirements and euro area monetary policy, we observe that the transmission of accommodative euro area monetary policy to corporate lending rates can be attenuated by contemporaneous increases in bank capital requirements. Moreover, more strongly capitalized banks increase their loan growth in response to accommodative monetary policy whereas, for weaker banks, increasing capital requirements implies a decrease in their corporate loan growth. Our results confirm a tradeoff between higher capital requirements and accommodating monetary policy originating from banks’ capital constraints.     

EMU and the transmission of monetary policy: evidence from business lending rates

This paper analyses the pass-through of money market rates to short-term and long-term business lending rates in the four largest euro area countries. The main findings of the paper are (1) that since the start of EMU loan rates appear to have become more responsive to money market rate changes in France, Italy and Spain, but not in Germany, and (2) that German loan rates are significantly more sluggish than loan rates in the other three large euro area countries. I also test for non-linear pass-through based on an asymmetric error-correction model but do not find much evidence of non-linearity in euro area interest rate pass-through.The views expressed in this paper do not necessarily represent the views of the Deutsche Bundesbank.     

Mortgage lending,monetary policy,and prudential measures in small euro‐area economies: Evidence from Ireland and the Netherlands

This paper examines whether the increased use of macroprudential policies since the global financial crisis has affected the impact of (euro‐area and foreign) monetary policy on mortgage lending in Ireland and the Netherlands, which are both small open economies in the euro area. Using quarterly bank‐level data on domestic lending in both countries for 2003–2018, we find that restrictive euro‐area monetary policy shocks reduce the growth of mortgage lending. We find evidence that stricter domestic prudential regulation mitigates this effect in Ireland, but not so in the Netherlands. There is some weak evidence for an international bank lending channel that can be mitigated by stricter lender‐based domestic prudential regulation.     

Interest rate volatility,asymmetric interest rate pass through and the monetary transmission mechanism in the Caribbean compared to US and Asia

We analyse asymmetric interest rate pass through, the impact of interest rate volatility on interest rates and the monetary transmission mechanism in the countries of the CSME² using the Asymmetric TAR and MTAR cointegration models by Enders and Siklos (2001) and the EC-EGARCH(1, 1)-M model by Wang and Lee (2009), who examined the same issue for the US and nine Asian countries. The CSME is a unique case of study given that it contains within it a monetary union: the OECS². First, our results show that there is complete pass through in the retail lending rate for Trinidad and Tobago and for St. Lucia and therefore, by extension, in all the countries of the OECS³ but not the other countries of the CSME. In contrast, Wang and Lee (2009) found complete pass through for the US deposit rate but not in the rates of the other nine Asian countries. Second, in Wang and Lee (2009) the results of the TAR and MTAR models show asymmetric cointegrating relationships in the lending rate of three Asian countries and the deposit rate of five Asian countries. Comparatively, our results show asymmetric cointegrating relationship in the lending and deposit rate of only three countries out of six: Jamaica, Guyana and St. Lucia. Third, the results from the conditional mean equation in the EC-EGARCH(1, 1)-M model in Wang and Lee (2009) show that for the countries with asymmetric cointegrating relationships, the lending rate displays downward adjustment rigidity and the deposit rate displays upward adjustment rigidity. In contrast, our results show that both rates for Jamaica display upward adjustment rigidity and both rates for Guyana and St. Lucia display downward adjustment rigidity. Finally, similarly to Wang and Lee (2009), our results from the EC-EGARCH(1, 1)-M models show that the effect of interest rate volatility on interest rates varies among countries. Three out of the Asian countries from Wang and Lee (2009) support the collusive pricing arrangement hypothesis while in our case it happens only in two countries out of six from the CSME: Guyana and St. Lucia. Moreover, the leverage effect exists in the lending rate for two out six countries in the CSME as it happens in Wang and Lee (2009) in two out of their Asian countries. Along the same lines, the leverage effect exists in the deposit rate of three countries in the CSME, contrary to Wang and Lee (2009), who do not find any evidence at all. This shows evidence of an important heterogeneity in the behaviour of the CSME countries and that Trinidad and Tobago and St. Lucia (showing the effect of belonging to a monetary union) are our only analysed countries where, as in the US, there is complete pass through and the central bank can transfer all the cost associated with an increase in its policy rate to the retail rates.     

Are there asymmetries in the response of bank interest rates to monetary shocks?

This article examines the velocity and asymmetry of the response of bank interest rates to monetary policy shocks. Using an asymmetric vector error correction model, it analyses the pass-through of changes in money market rates to retail bank interest rates in Italy in the period 1985–2002. The main results of the article are: (1) the speed of adjustment of bank interest rates to monetary policy changes increased significantly after the introduction of the 1993 Consolidated Law on Banking; (2) interest rate adjustment in response to positive and negative shocks is asymmetric in the short run, but not in the long run; (3) banks adjust their loan (deposit) rate faster during periods of monetary tightening (easing); (4) this asymmetry almost vanished since the 1990s.     

BANK OUTPUT MEASUREMENT IN THE EURO AREA: A MODIFIED APPROACH

Banks do not charge explicit fees for many of the services they provide, bundling the service payment with the offered interest rates. This output therefore has to be imputed using estimates of the opportunity cost of funds. We argue that rather than using the single short‐term, low‐risk interest rate as in current official statistics, reference rates should match the risk characteristics of loans and deposits. This would lower euro area imputed bank output by, on average, 28–54 percent compared with the current methodology, implying that euro area GDP (at current prices) is overstated by 0.11–0.18 percent. This adjustment also leads to more plausible shares in value added of income from fixed capital in the banking industry.     

Lenders on the storm of wholesale funding shocks: saved by the central bank?

We provide empirical evidence on banks’ responses to shocks in the wholesale funding market, using data of 181 euro area banks over the period from August 2007 to June 2013. Responses to funding liquidity shocks for both banks’ lending volumes and loan rates, to households and corporates, are analysed in a panel VAR framework. We thereby distinguish banks by country, extent of Eurosystem borrowing, bank size and capitalization. The results show that shocks in the securities and interbank markets have significant effects on loan rates and credit supply, particularly of banks in stressed countries of the periphery. The results also suggest that central bank liquidity has mitigated this effect on lending volumes. Lending to nonfinancial corporations is more sensitive to wholesale funding shocks than lending to households. Lending volumes of large banks that are typically more dependent on wholesale funding and banks with large exposure to sovereign bonds show stronger responses to wholesale funding shocks.     

Financial market fragmentation and monetary transmission in the euro area: what do we know?

We provide a survey on the literature examining financial market fragmentation in the euro area and discuss the policy options how to reduce it. The fragmentation has increased markedly since the outbreak of the global financial crisis in 2007. It declined somewhat from late 2012 onwards, but is still above the pre-crisis level. Interest rate pass-through has become less efficient primarily because of increased mark-ups and, to a certain extent, the lower responsiveness of bank interest rates to policy rates. The effectiveness of interest rate pass-through has become more heterogeneous across euro area countries, making a common monetary policy more difficult. The unconventional monetary policy conducted by the European Central Bank has reduced financial market fragmentation notably; however, this policy was not without side effects. Enhancing financial and fiscal stability in the euro area is key for the efficient functioning of the monetary transmission mechanism.     

Financial systems and the cost channel transmission of monetary policy shocks

We study the role of financial systems for the cost channel transmission of monetary policy in a calibrated business cycle model. We characterize financial systems by the share of bank-dependent firms and by the degree of the pass-through from policy to bank lending rates, for which we provide empirical estimates for the euro area and the US. For plausible calibrations of the dynamics of the lending rate we find that the cost effects directly related to interest rate movements have only a limited effect on the transmission mechanism.     

Bank lending and interest on excess reserves: An empirical investigation

This paper econometrically tests for effects on bank lending of the Federal Reserve’s policy of paying interest on excess reserves (IOER). Following the 2008 financial crisis, US banks decreased their loan allocations and increased holdings of excess reserves. A model of bank asset allocation shows that when the rate of IOER is higher than other short-term rates, banks will switch from zero excess reserves to a regime with higher excess reserves and lower lending. Using a sample of panel data on US banks from 2000 through 2018, we find evidence of a switch to a positive excess reserve regime in the post-crisis period. Controlling for market interest rates, loan demand, and economic activity, we find that IOER accounts for the majority of the decline in bank lending after the financial crisis.     

Controllability and Persistence of Money Market Rates along the Yield Curve: Evidence from the Euro Area

Abstract. Controllability of longer‐term interest rates requires that the persistence of their deviations from the central bank's policy rate (i.e. the policy spreads) remains sufficiently low. This paper applies fractional integration techniques to assess the persistence of policy spreads of euro area money market rates along the yield curve. Independently from anticipated policy rate changes, there is strong evidence for all maturities that policy spreads exhibit long memory. We show that recent changes in the operational framework and the communication strategy of the European Central Bank (ECB) have significantly decreased the persistence of euro area policy spreads and, thus, have enhanced the ECB's influence on longer‐term money market rates.     

THE TRANSMISSION OF THE MONETARY POLICY IN THE EURO AREA: THE ROLE OF THE BANKS’ BUSINESS MODEL

This paper sheds some new light on the incidence of the banks’ business model as a component of the bank lending channel in the euro area. Differently from existing literature, the analysis is led on the basis of the two main macroeconomic regions that today characterize the euro area: its north‐east (German‐centric) and south‐west halves. The observation period is 2008–2013, mainly featured by the financial and economic crisis. The empirical findings evidence that in the north‐east half of the euro area the cooperative banks leveraged the effects of the reduction in the interest rates in terms of new lending. In this respect, they differentiated from commercial and savings banks, which showed a more neutral impact on the transmission of the monetary policy decisions. These results highlight the distinctive role of the cooperative banks in terms of credit provision in Germany and in the whole north‐east half of the euro area. Nevertheless, this cooperative banking effect did not emerge for the south‐west half of the continent, particularly hit by the crisis. This may suggest that the bank's business model tend to be neutral to the transmission of the monetary policy in economies characterized by prolonged recessions.     

The determinants of China's lending rates and interest rates pass-through: A cointegration analysis

Based on quarterly data between Q4, 2008–Q4, 2017, this study examines the interest rates pass-through from policy rate to lending rates, and more broadly, the determinants of lending rates in China. The results show that while there is a certain level of pass-through from money market rates to lending rates, and the interest rates pass-through has improved after the interest rate liberalization completion on October 2015, this pass-through is also negatively affected by the asset quality of commercial banks and shadow banking activities as well. This study also finds that the macroeconomic condition also affects the lending rates.     

Asymmetric interest rate pass-through in the U.S., the U.K. and Australia: New evidence from selected individual banks

This paper provides new evidence on asymmetric interest rate pass-through in the U.S., the U.K. and the Australian economies by using the Nonlinear Auto-Regressive Distributed Lag model, central bank interest rates, lending and deposit interest rates from selected banks, spanning the period 2000–2013. The results provide evidence that corroborates the asymmetric pass-through market predictions. Robustness tests are also performed by splitting the sample period into that prior to and after the recent financial crisis. The new findings document that the asymmetric character of pass-through remains active only in the case of Australia.     

DEALER PRICING OF CONSUMER CREDIT*

Price discrimination incentives may induce dealers to bear the financial cost of their customers' credit purchases. We focus on how financial market imperfections make it possible to segment the customer population. When borrowing and lending rates differ from each other and from the rate of interest on a durable good purchase, the structure of those rates influences customers' choices to purchase on credit or cash terms, and the scope for dealers' price discrimination. Empirical analysis of a set of installment‐credit, personal‐loan, and regional interest rate data offers considerable support to the assumptions and implications of our theoretical framework.     

Interest rate pass through and asymmetries in retail deposit and lending rates: An analysis using data from Colombian banks

Using a sample of Colombian banks, we examine retail interest rate adjustment in response to changes in wholesale interest rates. Interest rate pass through running from wholesale to retail rates is found to be both partial and heterogeneous across banks. This suggests that the effectiveness of monetary policy is limited. Further investigation reveals that the behaviour of retail deposit rates appears consistent with collusive behaviour between banks insofar as interest rates are more rapidly adjusted downwards than upwards. In the case of retail lending rates, it appears that banks more rapidly reduce than increase rates. This suggests that expansionary monetary policy in Colombia may be relatively more effective than contractionary policy.     

The impact of regulatory measures on commercial bank interest rates: A micro analysis of the Barbados case

This study estimates the impact on commercial banks' interest-rate behavior of the more pervasive regulatory measures adopted by the Central Bank of Barbados. The results indicate that the cash ratio, the stipulated government securities ratio, and the savings deposit rate floor significantly impacted the loan rate for every bank. Generally, the deposit rate for any given bank has been responsive to fewer policy variables than the loan rate. The loan rates, though generally responsive to all policy variables other than the bank rate, have exhibited very low elasticities. The results indicated that the ceiling on the average lending rate, when it existed, depressed loan rates by less than 1 percent on average. This is largely attributable to the Central Bank's policy of adjusting the ceiling in line with market trends.     

Market power in distribution and pass‐through for consumers and producers

We examine the differential pass‐through of import prices into consumer and producer prices. We develop a framework with distribution costs and distribution market power. We then examine pass‐through from import prices to consumer and producer prices in the euro area using the U.S. import price as instrument. We find that pass‐through rates to producer prices are more sensitive to changes in distribution margins than pass‐through to consumer prices. Furthermore, only a portion of import price changes translate into domestic price changes limiting potential consumer benefits from tariff liberalization, with market power in distribution services being one important factor reducing pass‐through.