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How do banks’ funding costs affect interest margins?

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Author Info

  • Arvid Raknerud

    ()
    (Statistisk sentralbyrå (Statistics Norway))

  • Bjørn Helge Vatne

    ()
    (Norges Bank (Central Bank of Norway))

  • Ketil Rakkestad

    ()
    (Norges Bank (Central Bank of Norway))

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    Abstract

    We use a dynamic factor model and a detailed panel data set with quarterly accounts data on all Norwegian banks to study the effects of banks’ funding costs on their retail rates. Banks’ funds are categorized into two groups: customer deposits and long-term wholesale funding (market funding from private and institutional investors including other banks). The cost of market funding is represented in the model by the three-month Norwegian Inter Bank Offered Rate (NIBOR) and the spread of unsecured senior bonds issued by Norwegian banks. Our estimates show clear evidence of incomplete pass-through: a unit increase in NIBOR leads to an approximately 0.8 increase in bank rates. On the other hand, the difference between banks’ loan and deposit rates is independent of NIBOR. Our findings are consistent with the view that banks face a downward-sloping demand curve for loans and an upward-sloping supply curve for customer deposits.

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    File URL: http://www.norges-bank.no/en/Published/Papers/working-papers/2011/WP-201109/
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    Bibliographic Info

    Paper provided by Norges Bank in its series Working Paper with number 2011/09.

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    Length: 38 pages
    Date of creation: 06 Jul 2011
    Date of revision:
    Handle: RePEc:bno:worpap:2011_09

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    Related research

    Keywords: Interest rates; NIBOR; Pass-through; Funding costs; Bank panel data; Dynamic factor model;

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    Cited by:
    1. M Ismihan & G Ozkan, 2010. "Public debt and Financial development: A theoretical exploration," Discussion Papers 10/14, Department of Economics, University of York.

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