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The Interest Rate Pass-Through in German Banking Groups

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  • Hiltrud Nehls

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    (Ruhr-Universitaet Bochum)

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    Abstract

    The pass-through of market rates to retail interest rates is generally found to be particularly slow in Germany compared to other countries. One popular explanation is the organisation of the banking system in three strictly segregated "pillars": savings banks, credit cooperatives and private banks, and the low competitiveness of the first two of them. In this paper we analyse the differences of the interest rate pass-through between these banking groups. We employ a dataset covering (roughly) 30 banks' retail interest rates of four standard banking products (mortgages, consumer credit, savings accounts and time deposits). In a panel ECM we first estimate reference models of the interest pass-through for the four products. In a second step they are augmented by dummies representing the respective banking group. We find remarkable differences in the interest rate pass-thorugh: in general it is the big banks and savings banks reacting significantly quicker to changes in the market than regional banks and credit cooperatives. Hence, in contrast to the "common knowledge" of sluggish reactions of state banks, the savings banks take full part in competition. The credit cooperatives however, smoothing their retail rates, shield their customers from interest rate change risks.

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    Bibliographic Info

    Article provided by Justus-Liebig University Giessen, Department of Statistics and Economics in its journal Journal of Economics and Statistics.

    Volume (Year): 226 (2006)
    Issue (Month): 4 (July)
    Pages: 463-479

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    Handle: RePEc:jns:jbstat:v:226:y:2006:i:4:p:463-479

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    Related research

    Keywords: Interest rate pass-through; banking groups; panel ECM;

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    1. Heinemann, Friedrich & Schüler, Martin, 2002. "Integration benefits on EU retail credit markets: evidence from interest rate pass-through," ZEW Discussion Papers 02-26, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Peter Winker, 1999. "Sluggish adjustment of interest rates and credit rationing: an application of unit root testing and error correction modelling," Applied Economics, Taylor & Francis Journals, vol. 31(3), pages 267-277.
    3. Hempell, Hannah S., 2002. "Testing for Competition Among German Banks," Discussion Paper Series 1: Economic Studies 2002,04, Deutsche Bundesbank, Research Centre.
    4. Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series 0040, European Central Bank.
    5. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    6. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
    7. Claudio E. V. Borio & Wilhelm Fritz, 1995. "The response of short-term bank lending rates to policy rates: a cross-country perspective," BIS Working Papers 27, Bank for International Settlements.
    8. Andreas Worms, 2003. "Interbank Relationships and the Credit Channel in Germany," Empirica, Springer, vol. 30(2), pages 179-198, June.
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