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Understanding the price of new lending to households

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  • Button, Richard

    ()
    (Bank of England)

  • Pezzini, Silvia

    ()
    (Bank of England)

  • Rossiter, Neil

    ()
    (Bank of England)

Abstract

During the recent financial crisis Bank Rate was reduced sharply, but in general the interest rates charged on new lending to households did not fall by as much and indeed some interest rates rose. This article assesses the factors that have influenced new lending rates using a simple decomposition of new lending rates into lenders’ funding costs, credit risk charges and a residual (which includes both operating costs and the mark-up). Applying the decomposition to two indicative lending products suggests that funding costs have been an important driver of new lending rates and the residual has also risen. The residual needs to be interpreted with caution — by definition it reflects all the remaining unmodelled factors. But among other things, a larger residual is consistent with lenders increasing mark-ups over marginal costs for new lending, which may reflect a need to build higher capital levels within the banking sector.

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Bibliographic Info

Article provided by Bank of England in its journal Bank of England Quarterly Bulletin.

Volume (Year): 50 (2010)
Issue (Month): 3 ()
Pages: 172-182

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Handle: RePEc:boe:qbullt:0023

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Cited by:
  1. McLeay, Michael & Radia, Amar & Thomas, Ryland, 2014. "Money creation in the modern economy," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 14-27.
  2. Farag, Marc & Harland , Damian & Nixon, Dan, 2013. "Bank capital and liquidity," Bank of England Quarterly Bulletin, Bank of England, vol. 53(3), pages 201-215.
  3. Bridges, Jonathan & Rossiter, Neil & Thomas, Ryland, 2011. "Understanding the recent weakness in broad money growth," Bank of England Quarterly Bulletin, Bank of England, vol. 51(1), pages 22-35.
  4. Nielsen, Mette & Pezzini, Silvia & Reinold, Kate & Williams, Richard, 2010. "The financial position of British households: evidence from the 2010 NMG Consulting survey," Bank of England Quarterly Bulletin, Bank of England, vol. 50(4), pages 333-345.
  5. Bunn, Philip & Rostom, May & Domit, Silvia & Worrow, Nicola & Piscitelli, Laura, 2013. "The financial position of British households: evidence from the 2013 NMG Consulting survey," Bank of England Quarterly Bulletin, Bank of England, vol. 53(4), pages 351-360.
  6. Bridges, Jonathan & Gregory, David & Nielsen, Mette & Pezzini, Silvia & Radia, Amar & Spaltro, Marco, 2014. "The impact of capital requirements on bank lending," Bank of England working papers 486, Bank of England.
  7. Tucker, Paul & Hall, Simon & Pattani, Aashish, 2013. "Macroprudential policy at the Bank of England," Bank of England Quarterly Bulletin, Bank of England, vol. 53(3), pages 192-200.
  8. Butt, Nicholas & Domit, Silvia & McLeay, Michael & Thomas, Ryland & Kirkham, Lewis, 2012. "What can the money data tell us about the impact of QE?," Bank of England Quarterly Bulletin, Bank of England, vol. 52(4), pages 321-331.
  9. Bell, Venetia & Young, Garry, 2010. "Understanding the weakness of bank lending," Bank of England Quarterly Bulletin, Bank of England, vol. 50(4), pages 311-320.
  10. Pattani, Aashish & Vera, Giuseppe & Wackett , James, 2011. "Going public: UK companies’ use of capital markets," Bank of England Quarterly Bulletin, Bank of England, vol. 51(4), pages 319-330.
  11. Bell, Venetia & Butt, Nick & Talbot, James, 2013. "The Bank of England Bank Liabilities Survey," Bank of England Quarterly Bulletin, Bank of England, vol. 53(1), pages 68-76.
  12. Iris Biefang Frisancho-Mariscal & Peter Howells, 2010. "Interest rate pass-through and risk," Working Papers 1016, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  13. Churm, Rohan & Radia, Amar & Leake, Jeremy & Srinivasan, Sylaja & Whisker, Rishard, 2012. "The Funding for Lending Scheme," Bank of England Quarterly Bulletin, Bank of England, vol. 52(4), pages 306-320.

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