A disaggregated analysis of the determinants of the increase in lending rate spreads in Spain during the crisis

With the onset of the crisis, spreads between the lending rates charged to households and firms in Spain and interbank market rates, which basically reflect official interest rate expectations, tended to widen. As a result, the cost of borrowing for households and nonfinancial corporations has been too high for the expansionary stance of monetary policy. In theory, interest rates on new loans are determined on the basis of the marginal cost of the liabilities that finance the loans plus a risk premium reflecting the probability of default by the borrower. In addition, they may reflect other specific costs of banks, such as those arising from the need to set aside provisions for their existing loan portfolio and to increase their capital. Thus, lending rates may rise relative to interbank rates for one or more of the following reasons: a rise in bank funding costs (relative to interbank market rates), a rise in risk premiums and the pass-through of other specific costs. The aim of this article is to provide evidence on the possible role played by the abovementioned factors in the increase in lending rate spreads recorded in Spain. Individual level information is analysed for a wide sample of banks and the main types of loan are studied separately. The data are based on the information on interest rates on new lending that deposit-taking institutions send to the Banco de España on a monthly basis. Specifically, a sample with a six-month frequency has been selected, with the data of individual institutions that account, at all times, for 95% of lending to the resident private sector.1 The choice of loan categories considered is determined by the breakdowns available in this information source and includes the following: loans to households for house purchase, consumer credit and other lending to households, loans to firms of up to €1 million and loans to firms of more than €1 million. The period analysed runs from end-2004 to June 2014. This article has four sections in addition to this introduction. The first section, using aggregate data, reviews the evolution of lending rates for the different loan categories considered, relative to interbank market rates and various measures that approximate bank funding costs. The second section examines how the dispersion of rates by banks has varied over the period analysed. The third section analyses to what extent there exists a relationship between the cost of lending and certain individual characteristics of institutions. The main conclusions are summarised in the fourth section.