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Large Banks, Loan Rate Markup, and Monetary Policy

Author

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  • Vincenzo Cuciniello

    (Bank of Italy)

  • Federico M. Signoretti

    (Bank of Italy)

Abstract

A large body of empirical evidence suggests that bank loan margins are countercyclical. We develop a model where a countercyclical spread arises due to the strategic interaction between large intermediaries—i.e., banks whose individual behavior affects macroeconomic outcomes–and the central bank. We uncover a new mechanism related to market power of banks which amplifies the impact of monetary and technology shocks on the real economy. The level of the spread is positively connected to the level of entrepreneurs’ leverage, and the amplification effect is stronger the more aggressive the central bank’s response to inflation.

Suggested Citation

  • Vincenzo Cuciniello & Federico M. Signoretti, 2015. "Large Banks, Loan Rate Markup, and Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 11(3), pages 141-177, June.
    • Handle: RePEc:ijc:ijcjou:y:2015:q:3:a:4
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    Cited by:

    1. Cao, Jin & Chollete, Lorán, 2017. "Monetary policy and financial stability in the long run: A simple game-theoretic approach," Journal of Financial Stability, Elsevier, vol. 28(C), pages 125-142.
    2. Jonathan Benchimol & Caroline Bozou, 2022. "Desirable Banking Competition and Stability," Bank of Israel Working Papers 2022.18, Bank of Israel.
    3. Giovanni Melina & Stefania Villa, 2018. "Leaning Against Windy Bank Lending," Economic Inquiry, Western Economic Association International, vol. 56(1), pages 460-482, January.
    4. Chrysanthopoulou Xakousti & Mylonidis Nikolaos & Sidiropoulos Moise, 2024. "Regulatory capital requirements, inflation targeting, and equilibrium determinacy," Working Papers of BETA 2024-05, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    5. Antonio Acconcia & Elisa Scarinzi, 2022. "The Effects of Local Demand and Supply Restrictions on Markup," CSEF Working Papers 635, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 17 Mar 2022.
    6. Aysun, Uluc, 2016. "Bank size and macroeconomic shock transmission: Does the credit channel operate through large or small banks?," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 117-139.
    7. Dávila, Eduardo & Walther, Ansgar, 2020. "Does size matter? Bailouts with large and small banks," Journal of Financial Economics, Elsevier, vol. 136(1), pages 1-22.
    8. Monacelli, Tommas & Jamilov, Rustam, 2020. "Bewley Banks," CEPR Discussion Papers 15428, C.E.P.R. Discussion Papers.
    9. Alessandro Borin & Michele Mancini, 2016. "Foreign direct investment and firm performance: an empirical analysis of Italian firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 152(4), pages 705-732, November.
    10. Chrysanthopoulou, Xakousti, 2021. "Banks’ internalization effect and equilibrium," MPRA Paper 109275, University Library of Munich, Germany.
    11. Borys Grochulski & Daniel Schwam & Yuzhe Zhang, 2018. "Cyclical Properties of Bank Margins: Small versus Large Banks," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 1-33.
    12. Jiaqi Li, 2021. "Imperfect Banking Competition and Macroeconomic Volatility: A DSGE Framework," Staff Working Papers 21-12, Bank of Canada.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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