The stability of short-term interest rates pass-through in the euro area during the financial market and sovereign debt crises

Abstract

Papier disponible en WP sous la référence hal-01511667International audienceWe analyse the dynamics of the pass-through of banks’ marginal cost to bank lending rates over the 2008 crisis and the euro area sovereign debt crisis in France, Germany, Greece, Italy, Portugal and Spain. We measure banks’ marginal cost by their rate on new deposits, contrary to the literature that focuses on money market rates. This allows us to account for banks’ risks. We focus on the interest rate on new short-term loans granted to non-financial corporations in these countries. Our analysis is based on an error-correction approach that we extend to handle the time-varying long-run relationship between banks’ lending rates and banks’ marginal cost, as well as stochastic volatility. Our application is based on a harmonised monthly database from January 2003 to October 2014. We estimate the model within a Bayesian framework, using Markov Chain Monte Carlo methods (MCMC).We reject the view that the transmission mechanism is permanent over time. The long-run relationship moved with the sovereign debt crises to a new one, with a slower pass-through and higher bank lending rates. Its developments are heterogeneous from one country to the other. Impediments to the transmission of monetary rates depend on the heterogeneity in banks marginal costs and therefore, its risks. We also find that rates to small firms increase compared to large firms in a few countries. Using a VAR model, we show that overall, the effect of a shock on the rate of new deposits on the unexpected variances of new loans has been less important since 2010. These results confirm the slowdown in the transmission mechanism

Negative Interest Rates, Excess Liquidity and Retail Deposits: Banks’ Reaction to Unconventional Monetary Policy in the Euro Area

“…money market funds or floating rate notes) may not foresee the possibility of payments from the system as it prevents banks with high reliance on retail deposits from fully adjusting their funding costs. The literature on interest rate pass-through for the euro area finds evidence of imperfect pass-through onto loan rates (see Berke et al, 2013;Hristov et al, 2014;Gambacorta et al, 2015;Avouyi-Dovi et al, 2017;Horvath et al, 2018). The resulting squeeze in profit margins may impair the standard interest rate channel because high deposit banks might start raising loan rates instead of lowering them in response to a policy easing to protect their profit margins.…”

Bank Asset Quality and Monetary Policy Pass-Through

“…More recently, research has focused on the post-financial crisis era, showing increased fragmentation across countries (Ciccarelli et al, 2014;Aristei and Gallo, 2014) and less completeness of pass-through (Hristov et al, 2014). This divergence has been explained by higher funding costs (Illes et al, 2015), funding uncertainty (Ritz and Walther, 2015) and the changing marginal cost of raising deposits (Avouyi-Dovi et al, 2017). The use of micro data on banks balance sheets has grown to help understand the factors underlying these changes.…”

Bank heterogeneity in interest rate pass-through: A panel evidence of Pakistan

“…They found that correlation between policy rates and bank lending rates were reduced during crises due to increased risks. Similarly, Avouyi-Dovi et al (2017) found that interest rate pass-through was weakened during most financial crises in the Eurozone countries. Recently Horvath et al (2018) estimated the interest rate pass-through for the Eurozone throughout 2008-2016 using the heterogeneous panel technique PMG.…”