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

Holton, Sarah; d’Acri, Constanza Rodriguez

doi:10.2139/ssrn.2664161

Cited by 14 publications

(4 citation statements)

References 35 publications

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“…Following Gambacorta (2008) and Holton and Rodriguez d'Acri (2015), we use a single equation error correction model to estimate the pass-through of changes in monetary policy to banks' lending rates. This approach allows us to capture both short-and long-term dynamics in interest rate setting.…”

Section: Empirical Modelmentioning

confidence: 99%

“…The use of micro data on banks balance sheets has grown to help understand the factors underlying these changes. They point to the importance of bank-specific characteristics, in addition to macro variables in explaining developments in pass-through (Gambacorta, 2008;Holton and Rodriguez d'Acri, 2015). Similar to the US, size (Kashyap and Stein, 1995), liquidity (Kashyap and Stein, 2000) and capital ratios (Kishan and Opiela, 2000) are key to lending rates adjusting to policy changes.…”

Section: Introductionmentioning

confidence: 99%

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Bank asset quality & monetary policy pass-through

Byrne

Kelly

2018

Applied Economics

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The funding mix of European firms is heavily weighted towards bank credit, underscoring the importance of efficient pass-through of monetary policy actions to lending rates faced by firms. Euro area pass-through has shifted from being relatively homogenous to fragmented and incomplete since the financial crisis. Distressed loan books are a crisis hangover with direct implications for profitability, hampering banks ability to supply credit and lower loan pricing in response to reductions in the policy rate. This paper presents a parsimonious model to decompose the cost of lending and highlight the role of asset quality in diminishing pass-through. Using bank level data over the period 2008-2014, we empirically test the implications of the model, with results showing that asset quality, measured through a one percentage point increase in the impairment ratio have a significant negative impact, lowering immediate pass-through by 3 per cent. For impairment rates greater than 17 per cent, we find that pass-though is not significantly different from zero. We derive a measure of the hidden bad loan problem, the NPL gap, which we define as the excess of NPLs over impaired loans. We show it played a significant role in the fragmentation of euro area pass-through post-crisis.

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Section: Empirical Modelmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Bank asset quality & monetary policy pass-through

Byrne

Kelly

2018

Applied Economics

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“…• H4a: Banks with balance sheet weakness will charge a higher SFFP H4a follows directly from the long literature alluded to in the opening paragraph of Section 1 beginning with Bernanke (1983) which says that perturbations in the banking sector have real economic impacts. This literature has confirmed that funding stresses, capital levels, losses on bad loans and direct exposure to crises have economically meaningful impacts on banks' appetite for lending to the real economy (Puri et al, 2011;Jiménez et al, 2014), while variation in banks' balance sheet strength can explain variation in interest rate setting behaviour (Holton and Rodriguez d'Acri, 2015;Gambacorta and Mistrulli, 2014). In our setting, banks with higher CDS spreads or higher NPL ratios are expected to charge small firms a greater premium over large firms.…”

Section: Hypotheses and Empirical Set-upmentioning

confidence: 82%

Sources of the Small Firm Financing Premium: Evidence from Euro Area Banks

Holton

McCann

2017

SSRN Journal

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“…The first one focuses on whether bank lending rates are set according to market interest rates or central bank reference rates. In this regard, some authors have used the cost of funds approach (Bernhofer and van Treeck, 2013;Havránek et al, 2016), while others have used the monetary policy approach (Mojon, 2000;Becker et al, 2012;Holton and d'Acri, 2015). The cost of funds approach assumes that bank interest rates are set with a premium over the market rate; however, since it complicated to find matching maturities for all bank interest rates, the majority of scholars have opted for the monetary policy approach (Gregor et al, 2020), which uses the central bank policy rate as the reference rate for the pass-through to all lending rates.…”

Section: Literature Reviewmentioning

confidence: 99%

The interest rate pass-through by loan size: Evidence for Mexico, 2011-2019

Cotler,

Carrillo

2023

REMEF

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This paper measures the impact of changes in the central bank's reference rate on bank lending rates at both the aggregate level and by loan size. Our data come from the payroll and personal loan markets in Mexico for the period comprising 2011 to 2019. We use an autoregressive model with distributed lags, which allows for the possibility of asymmetric effects. The results show, among other findings, that the pass-through is small; it is not necessarily positive; asymmetric behaviour cannot be ruled out; and, its value depends on the loan size. These results imply that the effectiveness of monetary policy is weakened, in addition to the fact that the reaction of banks to changes in the target interest rate may have distributional implications. The originality of the paper lies in the grouping of interest rates by loan size and the use of a methodology that allows us to assess the existence of asymmetries. Its main shortcoming is the lack of data regarding the characteristics of the borrowers.

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

Cited by 14 publications

References 35 publications

Bank asset quality & monetary policy pass-through

Bank asset quality & monetary policy pass-through

Sources of the Small Firm Financing Premium: Evidence from Euro Area Banks

The interest rate pass-through by loan size: Evidence for Mexico, 2011-2019

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