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The dynamics of bank spreads and financial structure

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Abstract

This paper investigates the dynamics of the pass-through between market interest rates and bank interest rates in the euro area as a function of cyclical and structural differences in the financial system. We find that overall the speed of adjustment for loans is significantly faster than for deposits, and that the pass-through is especially sluggish for demand deposits and savings deposits. Bank soundness, credit risk and interest rate risk are found to exert a significant influence on the speed of pass through. We also find evidence of faster (slower) pass-through for loans (deposits) if the change in monetary policy was up (down). Overall, we find that competition among banks and competition from financial markets result in a faster bank interest rate pass-through. Finally, we find some evidence that financial innovation speeds up the pass-through for those market segments that are most directly affected by these innovations. JEL Classification: E43, G21.

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 714.

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Length: 52 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:ecb:ecbwps:20070714

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Keywords: Monetary transmission; banks; retail rates; financial structure.;

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