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The dynamics of bank spreads and financial structure

Author

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  • Gropp, Reint
  • Kok, Christoffer
  • Lichtenberger, Jung-Duk

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

Suggested Citation

  • Gropp, Reint & Kok, Christoffer & Lichtenberger, Jung-Duk, 2007. "The dynamics of bank spreads and financial structure," Working Paper Series 714, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2007714
    Note: 56868
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    References listed on IDEAS

    as
    1. Weth, Mark A., 2002. "The pass-through from market interest rates to bank lending rates in Germany," Discussion Paper Series 1: Economic Studies 2002,11, Deutsche Bundesbank.
    2. Massimiliano Affinito & Fabio Farabullini, 2006. "An empirical analysis of national differences in the retail bank interest rates of the euro area," Temi di discussione (Economic working papers) 589, Bank of Italy, Economic Research and International Relations Area.
    3. Morgan, Julian & Locarno, Alberto & Vallés, Javier & Berben, Robert-Paul, 2004. "Cross-country differences in monetary policy transmission," Working Paper Series 400, European Central Bank.
    4. Kok, Christoffer & Werner, Thomas, 2006. "Bank interest rate pass-through in the euro area: a cross country comparison," Working Paper Series 580, European Central Bank.
    5. Gambacorta, Leonardo, 2008. "How do banks set interest rates?," European Economic Review, Elsevier, vol. 52(5), pages 792-819, July.
    6. Castelnuovo, Efrem & Rodriguez-Palenzuela, Diego & Nicoletti Altimari, Sergio, 2003. "Definition of price stability, range and point inflation targets: the anchoring of long-term inflation expectations," Working Paper Series 273, European Central Bank.
    7. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, December.
    8. de Bondt, Gabe, 2002. "Retail bank interest rate pass-through: new evidence at the euro area level," Working Paper Series 136, European Central Bank.
    9. Carol Ann Northcott, 2004. "Competition in Banking: A Review of the Literature," Staff Working Papers 04-24, Bank of Canada.
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    More about this item

    Keywords

    banks; financial structure; monetary transmission; retail rates;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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