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Bank interest rates in a small European economy: Some exploratory macro level analyses using Finnish data

Author

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  • Karlo Kauko

    (Bank of Finland)

Abstract

This paper presents econometric analyses on the determination of bank deposit and lending rates using longitudinal Finnish data. Interest rate pass-through is very strong, possibly complete, in the case of lending rates; in the case of deposit rates the pass-through is far from complete, even in the long term. The monetary union has benefited customers by decreasing the average rate on new loans. Credit and interest rate risk premiums are clearly observable in banks' lending rates. The impact of money market rates on loan stock rates seems to have been non-linear; no obvious explanation for this phenomenon has been found.

Suggested Citation

  • Karlo Kauko, 2005. "Bank interest rates in a small European economy: Some exploratory macro level analyses using Finnish data," Finance 0508020, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0508020
    Note: Type of Document - pdf; pages: 48. Bank of Finland Research Discussion Papers 9/2005
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    File URL: http://econwpa.repec.org/eps/fin/papers/0508/0508020.pdf
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    References listed on IDEAS

    as
    1. Vesala, Jukka, 1995. "Testing for competition in banking : Behavioral evidence from Finland," Scientific Monographs, Bank of Finland, number 1995_001, December.
    2. Solange Berstein & Rodrigo Fuentes, 2005. "Concentration and Price Rigidity: Evidence for the Deposit Market in Chile," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 1-22, January-J.
    3. Sander, Harald & Kleimeier, Stefanie, 2004. "Convergence in euro-zone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 461-492, April.
    4. Maudos, Joaquin & Fernandez de Guevara, Juan, 2004. "Factors explaining the interest margin in the banking sectors of the European Union," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2259-2281, September.
    5. Gambacorta, Leonardo, 2008. "How do banks set interest rates?," European Economic Review, Elsevier, vol. 52(5), pages 792-819, July.
    6. Hutchison, David E, 1995. "Retail Bank Deposit Pricing: An Intertemporal Asset Pricing Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 217-231, February.
    7. Canhoto, Ana, 2004. "Portuguese banking: A structural model of competition in the deposits market," Review of Financial Economics, Elsevier, vol. 13(1-2), pages 41-63.
    8. Hannan, Timothy H. & Prager, Robin A., 2004. "The competitive implications of multimarket bank branching," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 1889-1914, August.
    9. Rosen, Richard J., 2007. "Banking market conditions and deposit interest rates," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3862-3884, December.
    10. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, January.
    11. Paul Mizen & Boris Hofmann, 2002. "Base rate pass-through: evidence from banks' and building societies' retail rates," Bank of England working papers 170, Bank of England.
    12. Ehrmann, Michael & Backé, Peter, 2003. "Monetary policy transmission in the euro area: any changes after EMU?," Working Paper Series 240, European Central Bank.
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    Citations

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    Cited by:

    1. Putkuri, Hanna, 2010. "Housing loan rate margins in Finland," Research Discussion Papers 10/2010, Bank of Finland.
    2. Machava, Agostinho, 2017. "The Macroeconomic Determinants of the Pass-Through from the Market Interest Rate to the Bank Lending Rate in Mozambique," Umeå Economic Studies 954, Umeå University, Department of Economics.
    3. Kilponen, Juha & Orjasniemi, Seppo & Ripatti, Antti & Verona, Fabio, 2016. "The Aino 2.0 model," Research Discussion Papers 16/2016, Bank of Finland.
    4. Gulan, Adam & Haavio, Markus & Kilponen, Juha, 2014. "Kiss me deadly: From Finnish great depression to great recession," Research Discussion Papers 24/2014, Bank of Finland.

    More about this item

    Keywords

    G21; E43; E44;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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