How Do Banks’ Funding Costs Affect Interest Margins?

Abstract

Abstract:We use a dynamic factor model and a detailed panel data set with quarterly accounts data on all Norwegian banks to study the effects of banks' funding costs on their retail rates. Banks' funds are categorized into two groups: customer deposits and long-term wholesale funding (market funding from private and institutional investors including other banks). The cost of market funding is represented in the model by the three-month Norwegian Inter Bank Offered Rate (NIBOR) and the spread of unsecured senior bonds issued by Norwegian banks. Our estimates show clear evidence of incomplete pass-through: a unit increase in NIBOR leads to an approximately 0.8 increase in bank rates. On the other hand, the difference between banks' loan and deposit rates is independent of NIBOR. Our findings are consistent with the view that banks face a downward-sloping demand curve for loans and an upward-sloping supply curve for customer deposits. Keywords

The Impact of Short- Term Interest Rates on Bank Funding Costs

“…The study found clear evidence showing pass through from the NIBOR to the loan rates. Similarly, Raknerud et al (2011) examined the impact of bank funding costs on interest margin on Norwegian banks. The study used dynamic factor model and panel data set with quarterly accounts data.…”

Jagged Cliffs and Stumbling Blocks: Interest Rate Pass-Through Fragmentation During the Euro Area Crisis

“…He also finds that the rates of liquid and well-capitalised banks react less to changes in official rates, but that bank size is not relevant. Cecchin (2011) and Raknerud, Vatne, and Rakkestad (2011) find evidence that pass-through is sluggish and incomplete for Swiss and Norwegian banks respectively. Gambacorta and Mistrulli (2011) analyse interest rate pricing in Italy following the collapse of Lehman Brothers.…”

The Relation between Banks' Funding Costs, Retail Rates and Loan Volumes: An Analysis of Norwegian Bank Micro Data

“…The hypothesis that r t is not a unit root process was considered in Raknerud et al (2011), using both daily data and quarterly data, applying the test proposed by Choi (1994). The null hypothesis of stationarity against the alternative that r t is a unit root process was not rejected.…”

“…The period analyzed in this paper -2002Q1 to 2011Q3 -includes a period of financial distress and is also characterized by increased competition and productivity growth due to rapid increase in Internet-based payment services. One effect of the latter is that the interest margin between loan rates and deposit rates has decreased steadily over the period (or at least until the financial crisis), as documented in Raknerud et al (2011).…”