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The influence of sovereign bond yields on bank lending rates: the pass-through in Europe

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Abstract

In the wake of the recent crises, the question arose how to ensure the transmission of monetary policy to the lending rates for loans to private nonbanks, in particular against the background of divergent government bond yield changes. This paper investigates which variables help explain changes of long-term fixed-rate bank lending rates on loans to the private nonfinancial sector in 21 EU countries. We conduct a cross-country panel study and analyze vector error correction models for each country. We find that long-term sovereign bond yields have a significant positive and economically substantial impact on long-term lending rates in most euro area and some non-euro area countries. Our findings lend support to the view that unconventional monetary policy can influence long-term lending rates via its impact on government bond yields. Furthermore, our insights suggest adopting a cautious approach when designing changes to the regulatory treatment of sovereign exposures. To the extent that such changes cause a sustained widening of sovereign yield spreads, the impact on long-term lending rates could entrench real economic divergences between EU countries and in particular within the euro area.

Suggested Citation

  • Markus Eller & Thomas Reininger, 2016. "The influence of sovereign bond yields on bank lending rates: the pass-through in Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 54-78.
  • Handle: RePEc:onb:oenbfi:y:2016:i:2:b:1
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    Cited by:

    1. repec:eee:ecmode:v:73:y:2018:i:c:p:71-88 is not listed on IDEAS
    2. Gregor, Jiří & Melecký, Martin, 2018. "The pass-through of monetary policy rate to lending rates: The role of macro-financial factors," Economic Modelling, Elsevier, vol. 73(C), pages 71-88.

    More about this item

    Keywords

    sovereign debt crisis; sovereign spread; sovereign credit risk; sovereign yield; government bond yield; bank interest rates; bank lending; lending conditions; long-term financing; bank funding; transmission; interest rate pass-through;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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