The divergence of bank lending rates from policy rates after the financial crisis: The role of bank funding costs

Illes, Anamaria; Lombardi, Marco; Mizen, Paul

doi:10.1016/j.jimonfin.2019.01.003

Cited by 36 publications

(25 citation statements)

References 61 publications

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“…This study also found that relationship between central banks' policy rate and bank lending rate are proven insignificant. These results have been described in Illes et al (2015) studied reasons why movements in banks' lending rates different with its country's policy rate especially after the crisis. There are three main arguments: (1) policy rate is rather a short-term benchmark rate when compared with a longer tenor of bank loans; (2) banks did not acquire funding at the price of central bank interest rate; and (3) banks tends to face higher funding cost in post-crisis period.…”

Section: Empirical Findingsmentioning

confidence: 75%

Measuring the Impact of Higher Capital Requirement to Bank Lending Rate and Credit Risk: The Case of Southeast Asian Countries

Pratiwi¹,

Wibowo²

2017

Proceedings of the International Conference on Business and Management Research (ICBMR-17)

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This study discusses the impact of increasing bank capital against lending interest rate, amount of loans, and banks' credit risk exposure. The study utilized panel data from 18 top banks in 5 Southeast Asian countries during the period of 2008-2015. The findings show that there is no significant relationship between capital increase and lending interest rate in Southeast Asia. This is due to lending interest rate movement was driven mostly from banks' cost structure, rather than capital charge. Although lending interest rate has significant relationship with amount of loans, there are no transmitted impact of the capital increase to the economy. The study also found that bank capital level has positive relationship with credit risk which indicates that level of bank capital serves as a buffer against credit risk.

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Section: Empirical Findingsmentioning

confidence: 75%

Measuring the Impact of Higher Capital Requirement to Bank Lending Rate and Credit Risk: The Case of Southeast Asian Countries

Pratiwi¹,

Wibowo²

2017

Proceedings of the International Conference on Business and Management Research (ICBMR-17)

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“…Nonetheless, the above model may be criticized on the ground that, first, banks are not bound to borrow from the Central bank and pay a penalty rate and, second, developments of bank retail rates do not necessarily reflect the behavior of the policy rate. The policy rate is indeed a very short-term rate, while lending and deposit rates are expected to reflect long-term rates; furthermore, banks may obtain funds from a variety of sources, including retail deposits, interbank, bonds and Treasury bill markets (Illes, Lombardi and Mizen, 2015). Hence, using the policy rate to measure the interest rate pass-through would lead to erroneous conclusion on the interest rate pass-through process.…”

Section: D=r+l-s……………………………………………………………………………mentioning

confidence: 99%

A Cross-Examination of the Perspectives on Why Natural Resource Abundant Economies Tend to Grow Slowly

2020

JESD

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The influence of monetary policy depends on the effectiveness of the interest rate pass-through, that is the size and the speed to which changes in the central bank policy actions are transmitted to bank retail interest rates. The objective of this paper is to investigate the relationship between the policy-controlled interest rates (Repo and Treasury bill rates) and the bank interest rates (interbank, deposit and lending rates) in Rwanda with the view to empirically examine the size and speed of the interest rate pass-through in the long run and short run and determine whether the pass-through process is symmetric or asymmetric. The empirical results of the paper, using monthly data covering the period from January 2008 to December 2017 indicate that the interbank, deposit and policy rates are cointegrated, hence a non-linear error correction model has been used to assess the asymmetric adjustment dynamics to long-run equilibrium. By contrast, the lending rates were found to be cointegrated with none of the selected policy rates; hence the interest rate pass-through has been estimated by means of a transformed autoregressive distributed lag model. The empirical results of the study show that the estimated long-run as well as the short run interest rate pass-through of the selected policy rates to deposit and lending rates is weak and sluggish. Regarding the asymmetric adjustment process of the bank rates, empirical results show that depending on the policy rate, the interbank and deposit rates react differently following a negative and a positive shock in the policy rates; but no evidence was provided for asymmetric adjustment of the lending rates.* This research was supported by a grant from the African Research Consortium (AERC). Special thanks to resource persons and researchers for their helpful discussions and suggestions during different AERC Bi-Annual workshops. I. IntroductionThe interest rate pass-through has received a great deal of attention in theoretical and empirical research on monetary policy making. However, while the bulk of the literature on the issue was devoted to industrial countries, it is only recently that a few studies focused on emerging and developing countries. The interest rate pass-through, defined as the extent to which changes in the policy rate are transmitted to bank retail interest rates, i.e. the deposit and lending rates, is a key element in the monetary transmission mechanism and the effectiveness of monetary policy. Central banks use the policy rate to influence the short-term money market rates which in turn affect bank retail rates; in the end, banks' decisions on the yield of their assets and liabilities affect the behavior of deposit holders and borrowers on savings, investment and consumption. A fuller and faster interest rate pass-through enhances the effectiveness of monetary policy and improves the capacity of the central bank to achieve its macroeconomic goals of stabilizing aggregate output and prices. Therefore, the determination of the size and speed of the int...

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“…By analyzing the cointegration between policy rates and banks' weighted cost of capital, Illes, Lombardi, and Mizen (2019) find that the sensitivity of banks' average funding costs to policy rates has declined in recent years. 5…”

Section: Special Marketmentioning

confidence: 99%

Monetary Policy Disconnect

2020

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We analyze and quantify how two forms of segmentation lead to the monetary policy disconnect. To do this, we study the monetary policy transmission through the main short-term funding market, the repurchase agreement (repo) market. First, the lending rates of banks with access to the central bank's deposit facility are less responsive to the monetary policy target rate. Second, rates of repos secured by assets eligible for Quantitative Easing programs diverge more from the target rate. We also find that both forms of segmentation add to one another, suggesting an amplifying effect in weakening monetary policy transmission.

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The divergence of bank lending rates from policy rates after the financial crisis: The role of bank funding costs

Cited by 36 publications

References 61 publications

Measuring the Impact of Higher Capital Requirement to Bank Lending Rate and Credit Risk: The Case of Southeast Asian Countries

Measuring the Impact of Higher Capital Requirement to Bank Lending Rate and Credit Risk: The Case of Southeast Asian Countries

A Cross-Examination of the Perspectives on Why Natural Resource Abundant Economies Tend to Grow Slowly

Monetary Policy Disconnect

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