The Interest Rate Pass-Through in German Banking Groups

2006 ◽  
Vol 226 (4) ◽  
Author(s):  
Hiltrud Nehls
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Common Knowledge ◽  
Banking System ◽  
Savings Banks ◽  
Time Deposits ◽  
Credit Cooperatives ◽  
Pass Through ◽  
The Interest Rate ◽  
Interest Rate Change

SummaryThe pass-through of market rates to retail interest rates is generally found to be particularly slow in Germany compared to other countries. One popular explanation is the organisation of the banking system in three strictly segregated “pillars”: savings banks, credit cooperatives and private banks, and the low competitiveness of the first two of them. In this paper we analyse the differences of the interest rate pass-through between these banking groups. We employ a dataset covering (roughly) 30 banks’ retail interest rates of four standard banking products (mortgages, consumer credit, savings accounts and time deposits). In a panel ECM we first estimate reference models of the interest pass-through for the four products. In a second step they are augmented by dummies representing the respective banking group. We find remarkable differences in the interest rate pass-through: in general it is the big banks and savings banks reacting significantly quicker to changes in the market than regional banks and credit cooperatives. Hence, in contrast to the “common knowledge” of sluggish reactions of state banks, the savings banks take full part in competition. The credit cooperatives however, smoothing their retail rates, shield their customers from interest rate change risks.

scholarly journals Risk Management for Bonds with Embedded Options

Mathematics ◽  
2020 ◽  
Vol 8 (5) ◽  
pp. 790
Author(s):  
Antonio Díaz ◽  
Marta Tolentino
Keyword(s):  
Risk Management ◽  
Interest Rate ◽  
Interest Rates ◽  
Interest Rate Risk ◽  
Interest Rate Models ◽  
Management Measures ◽  
Interest Rate Risk Management ◽  
Embedded Options ◽  
The Interest Rate ◽  
Interest Rate Change

This paper examines the behavior of the interest rate risk management measures for bonds with embedded options and studies factors it depends on. The contingent option exercise implies that both the pricing and the risk management of bonds requires modelling future interest rates. We use the Ho and Lee (HL) and Black, Derman, and Toy (BDT) consistent interest rate models. In addition, specific interest rate measures that consider the contingent cash-flow structure of these coupon-bearing bonds must be computed. In our empirical analysis, we obtained evidence that effective duration and effective convexity depend primarily on the level of the forward interest rate and volatility. In addition, the higher the interest rate change and the lower the volatility, the greater the differences in pricing of these bonds when using the HL or BDT models.

scholarly journals Does the Interest Rate Form Business Cycle?

2019 ◽  
Vol 4 (1) ◽  
pp. 29-34
Author(s):  
Bijan Bidabad ◽  
Abul Hassan
Keyword(s):  
Interest Rate ◽  
Business Cycle ◽  
Interest Rates ◽  
Banking System ◽  
Real Economy ◽  
Short Term ◽  
The Usa ◽  
Rate Form ◽  
The Interest Rate

Dynamic structural behavior of depositor, bank and borrower and the role of banks in forming business cycle are investigated. We test the hypothesis that does banks behavior make oscillations in the economy through the interest rate. By dichotomizing banking activities into two markets of deposit and loan, we show that these two markets have non-synchronized structures, and this is why the money sector fluctuation starts. As a result, the fluctuation is transmitted to the real economy through saving and investment functions. Empirical results assert that in the USA, the banking system creates fluctuations in the money sector and real economy as well through short-term interest rates

Inside the Bank Box

2019 ◽  
pp. 368-405
Author(s):  
Leonardo Gambacorta ◽  
Paul Mizen
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Adjustment Costs ◽  
Bank Lending ◽  
Bank Capital ◽  
Bank Lending Channel ◽  
Lending Channel ◽  
Pass Through ◽  
The Interest Rate

Central bank policy operates first through financial markets and then through banks as they adjust their interest rates. This chapter discusses the transmission of policy in this first step of the monetary transmission mechanism, known as interest-rate pass-through. Historically, the focus of attention has been the interest-rate channel. We show the origins of this channel via a microfounded model of interest-rate setting by deposit-taking institutions that are Cournot oligopolists facing adjustment costs. We then examine other channels such as the bank lending channel and the bank capital channel and the role of central bank communications, signaling, and forward guidance over future interest rates. Each is shown to influence the setting of current short-term interest rates. The chapter closes with some issues for the future of pass-through in the transmission process.

scholarly journals A FINANCIAL ANALYSIS OF RESWITCHING

2021 ◽  
pp. 220-244
Author(s):  
Rafael García Iborra
Keyword(s):  
Interest Rate ◽  
Business Cycle ◽  
Interest Rates ◽  
Inverse Relationship ◽  
Financial Analysis ◽  
Banking System ◽  
Weighted Average ◽  
Business Cycle Theory ◽  
Natural Level ◽  
The Interest Rate

The classical Austrian Business Cycle Theory (ABCT) is based on an inverse relationship between the so-called Average Period of Production (APP) or ‘roundaboutness’ and the interest rate. According to Böhm-Bawerk (1884 [1891]), the APP is the weighted average time that a unit of labor is locked up in the production process1; moreover, there is a positive relationship between savings (the ‘subsistence fund’) and the APP: the higher the latter the higher the former, which implies an inverse relationship between interest rates and the APP. Thus, a lower interest rate will lead to a higher APP ceteris paribus. Hayek (2008) based his Hayekian triangles on Böhm-Bawerk’s work: a lower (higher) interest rate leads to a more (less) rounda- bout structure of production, increasing (decreasing) the APP. Including Mises’s (1921) business cycle theory into the analysis, whenever the interest rate is pushed lower than its ‘natural level’, either by the central bank or the banking system, there is an unsus- tainable extension of the APP that will generate an economic boom; the crisis will irremediably follow, as the APP will pull back towards its natural level. From this brief characterization of the ABCT, it is easy to notice the key role of the inverse relationship between interest rates and roundaboutness; without it, there is no connection from changes in interest rates and roundaboutness, and the ABCT falls apart. The reswitching of techniques is precisely a counterexample to that relationship, as it claims there are situations in which lower interest rates do not lead to more roundabout productive struc- tures. The organization of this paper is as follows: the next section describes the reswitching of techniques as stated by Samuelson (1966) and the implication for the classical ABCT, based on a phys- ical measure of roundaboutness; section 3 analyzes the alternative of applying corporate finance to the ABCT following Cachanosky and Lewin (2014). Section 4 is a financial analysis of Samuelson’s example, argues why modified duration should replace Böhm- Bawerk’s APP as a measure of roundaboutness, and shows why it does not represent a paradox to the ABCT when the financial approach is used. Sections 5 and 6 address the question from two additional perspectives: a neoclassical with fully flexible prices but fixed techniques and the Austrian related dynamic efficiency.

scholarly journals COMPARISON OF THE PASS-THROUGH SPEED MODELS OF DIFFERENT MARKETS: AN EMPIRICAL STUDY OF THE MARKETS OF MAINLAND CHINA AND TAIWAN

2020 ◽  
Author(s):  
Chi Ming Ho ◽  
Wu Yih Lin
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Mainland China ◽  
Rate Sensitivity ◽  
Interest Rate Spread ◽  
Spread Model ◽  
Pass Through ◽  
Loan Interest Rates ◽  
The Interest Rate

This paper adopted the Boone Indicator, developed by Boone et al. (2008) and Van Leuvensteijn et al. (2011; 2013), to investigate the influence of different pass-through spread models in the competition among banks in emerging markets. With the market share of banks as a dependent variable and marginal cost as an independent variable, this paper probed into the competition among banks regarding the loan market to determine whether competition on the loan interest rates of banks affected the pass-through of monetary policy-related interest rates. After analyzing approximately 5,657 entries of records of the banking industries in Taiwan and mainland China, this paper reached three significant conclusions: 1) the Boone Indicator Model pointed out that, competition in the banking market of mainland China was more intense than that of Taiwan; 2) empirical research based on the Interest Rate Spread Model indicated that the spread of mainland China was lower than that of Taiwan; 3) the Passthrough Speed Model implied that, the interest rate sensitivity of the market of mainland China was higher than that of the Taiwan market. The above results indicate that the influence of monetary policy pass-through on the interest rate of the market in mainland China is faster than in Taiwan.  

scholarly journals Nonlinear interest rate-setting behaviour of German commercial banks

2019 ◽  
Vol 24 (3) ◽  
Author(s):  
Ludwig Heinzelmann ◽  
Martin Missong
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Commercial Banks ◽  
Smooth Transition ◽  
Bank Management ◽  
Management Perspective ◽  
Policy Measures ◽  
Pass Through ◽  
The Interest Rate ◽  
Effectiveness Of Monetary Policy

AbstractWe quantitatively analyse the interest rate-setting behaviour of German commercial banks during the period 2003–2014, using nonlinear (smooth transition) cointegration approaches. Our empirical results reveal principles applied by commercial banks in (re-)gaining margins in the aftermath of the financial crisis. We substantiate our findings using economic arguments from a bank management perspective. As our study contributes to a better understanding of the pass-through mechanism from market to commercial banks’ customer interest rates, the results will also be relevant to meaningful assessments of the effectiveness of monetary policy measures.

Interest Rate Pass-Through: Empirical Results for the Euro Area

2005 ◽  
Vol 6 (1) ◽  
pp. 37-78 ◽  
Author(s):  
Gabe J. de Bondt
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Euro Area ◽  
Vector Autoregressive ◽  
Empirical Results ◽  
Marginal Costs ◽  
Lending Rates ◽  
The Difference ◽  
Pass Through ◽  
The Interest Rate

Abstract This paper empirically examines the interest rate pass-through at the euro area level. The focus is on the pass-through of official interest rates, approximated by the overnight interest rate, to longer-term market interest rates, which, in turn, are a proxy for the marginal costs for banks to attract deposits or grant loans, and therefore passed through to retail bank interest rates. Empirical results, on the basis of a (vector) error-correction and vector autoregressive model, suggest that the pass-through of official interest to market interest rates is complete for money market interest rates up to three months, but not for market interest rates with longer maturities. Furthermore, the immediate pass-through of changes in market interest rates to bank deposit and lending rates is found to be at most 50%, whereas the final pass-through is typically found to be close to 100%, in particular for lending rates. Empirical results for a sub-sample starting in January 1999 show qualitatively similar findings and are supportive of a quicker interest rate pass-through since the introduction of the euro. It is shown that the difference between the adjustment speed of bank deposit and lending rates (typically around one versus three months since the common monetary policy) can to a large extent significantly be explained by credit risk considerations.

scholarly journals Stochastic model of microcredit interest rate in Morocco

2016 ◽  
Vol 6 (4) ◽  
pp. 268-273 ◽  
Author(s):  
Ghita Bennouna ◽  
Mohamed Tkiouat
Keyword(s):  
Interest Rate ◽  
Stochastic Model ◽  
Interest Rates ◽  
Low Income ◽  
Financial Services ◽  
Banking System ◽  
Well Being ◽  
Microfinance Institutions ◽  
Social Mission ◽  
The Interest Rate

Access to microcredit can have a beneficial effect on the well-being of low-income households excluded from the traditional banking system. It allows this population to receive affordable financial services to help them to meet their needs and to improve their living conditions. However to provide access to credit, microfinance institutions should ensure not only their social mission but also commercial and financial mission to enable the institution to perpetuate and become self-sufficient. To this end, MFIs (microfinance institutions) must apply an interest rate that covers their costs and risk, while generating profits, Also microentrepreneurs need, to this end, to ensure the profitability of their activities. This paper presents the microfinance sector in Morocco. It focuses then on the interest rate applied by the Moroccan microfinance institutions; it provides also a comparative study between Morocco and other comparable countries in terms of interest rates charged to borrowers. Finally, this article presents a stochastic model of the interest rate in microcredit built in random loan repayment periods and on a real example of the program of loans of microfinance institution in Morocco.

The effect of negative policy rates on the interest-rate pass-through mechanism in the eurozone

2019 ◽  
Vol 7 (2) ◽  
pp. 247-262 ◽  
Author(s):  
Yannis Panagopoulos ◽  
Ekaterini Tsouma
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Money Market ◽  
Negative Interest Rates ◽  
Time Period ◽  
Pass Through ◽  
The Interest Rate ◽  
The Impact ◽  
The Relationship

This paper examines the impact of the June 2014 switch to negative interest rates (NIRs) by the European Central Bank (ECB) on the operation of the eurozone interest-rate pass-through (IRPT) mechanism. We focus on the relationship between major central-bank policy rates and selected money-market rates. That link is identified as the first stage of the IRPT mechanism and its dynamics are analysed using Granger causality and cointegration techniques for the time period January 2000–June 2017. Our empirical findings indicate a feedback relationship between the ECB policy and the money-market rates in the period prior to June 2014, but that relationship is non-operative when considering only the period of NIRs.

scholarly journals Transmission Mechanism of Monetary Policy: Case Study of Interest Rate Channel in India

2018 ◽  
Vol 4 (02) ◽  
Author(s):  
Prakash Anant Salvi ◽  
Davinder Kaur Suri
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Real Economy ◽  
Policy Transmission ◽  
Pass Through ◽  
The Interest Rate ◽  
Interest Rate Channel

In India, prior to 1991, the tightly controlled interest rates caused impediments in the functioning of the interest rate channel of monetary policy transmission while after 1991, the RBI undertook various measures to strengthen the market-determination of interest rates. This paper has examined the evolution of the interest channel in India across the period 1985 to 2014 firstly by studying the interest rate pass-through using the Correlation matrix and the OLS technique and secondly, by studying the transmission of policy rates to the real economy using the reduced VAR model. The results show that the transmission of interest rates pass-through from policy rates to market interest rates (both - short-term as well as long-term) has strengthened while desired impact of long term market interest rates on industrial production and inflation appears to be weak.

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