Interest Rate Pass-through Mechanism in Turkish Banking Sector; Analysis of the Causality Relationship from Weekly-o/n Repo Rates to Bank Lending Interest Rates

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.

Download Full-text

The Dynamics of Bank Spreads and Financial Structure

Quarterly Journal of Finance ◽

10.1142/s2010139214500141 ◽

2014 ◽

Vol 04 (04) ◽

pp. 1450014 ◽

Cited By ~ 25

Author(s):

Reint Gropp ◽

Christoffer Kok ◽

Jung-Duk Lichtenberger

Keyword(s):

Monetary Policy ◽

Financial Markets ◽

Interest Rates ◽

Banking Sector ◽

Interest Rate Derivatives ◽

Developed Markets ◽

Speed Up ◽

Pass Through ◽

Bank Spreads ◽

Effectiveness Of Monetary Policy

This paper investigates the effect of within banking sector competition and competition from financial markets on the dynamics of the transmission from monetary policy rates to retail bank interest rates in the euro area. We use a new dataset that permits analysis for disaggregated bank products. Using a difference-in-difference approach, we test whether development of financial markets and financial innovation speed up the pass through. We find that more developed markets for equity and corporate bonds result in a faster pass-through for those retail bank products directly competing with these markets. More developed markets for securitized assets and for interest rate derivatives also speed up the transmission. Further, we find relatively strong effects of competition within the banking sector across two different measures of competition. Overall, the evidence supports the idea that developed financial markets and competitive banking systems increase the effectiveness of monetary policy.

Download Full-text

Who Bears Interest Rate Risk?

Review of Financial Studies ◽

10.1093/rfs/hhy113 ◽

2018 ◽

Vol 32 (8) ◽

pp. 2921-2954 ◽

Cited By ~ 4

Author(s):

Peter Hoffmann ◽

Sam Langfield ◽

Federico Pierobon ◽

Guillaume Vuillemey

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Banking Sector ◽

Balance Sheet ◽

Interest Rate Risk ◽

Cross Sectional ◽

Net Worth ◽

Loan Rate ◽

Rate Risk ◽

European Banking

Abstract We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. Contrary to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance-sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector. Received October 31, 2017; editorial decision August 30, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Download Full-text

Symmetric and asymmetric adjustment of bank deposit interest rates: empirical evidence from Kenya

International Journal of Emerging Markets ◽

10.1108/ijoem-03-2020-0289 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Moses Nzuki Nyangu ◽

Freshia Wangari Waweru ◽

Nyankomo Marwa

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Interest Rates ◽

Asymmetric Adjustment ◽

Deposit Rate ◽

Content Type ◽

Long Run ◽

Adjustment Speed ◽

Short Run ◽

Pass Through

PurposeThis paper examines the sluggish adjustment of deposit interest rate categories with response to policy rate changes in a developing economy.Design/methodology/approachSymmetric and asymmetric error correction models (ECMs) are employed to test the pass-through effect and adjustment speed of deposit rates when above or below their equilibrium levels.FindingsThe findings reveal an incomplete pass-through effect in both the short run and long run while mixed results of symmetric and asymmetric adjustment speed across the different deposit rate categories are observed. Collusive pricing arrangement behavior is supported by deposit rate categories that adjust more rigidly upwards than downwards, while negative customer reaction behavior is supported by deposit rate categories that adjust more rigidly downwards than upwards.Practical implicationsEven though the findings indicate an aspect of increased responsiveness over the period, the sluggish adjustment of deposit rates imply that monetary policy is still ineffective and not uniform across the different deposit rate categories.Originality/valueTo the best of the authors' knowledge, this is the first study to empirically examine both symmetric and asymmetric adjustment behavior of deposit interest rate categories in Kenya. The findings are key to policy makers as they provide insights on how long it takes to adjust different deposit rate categories to monetary policy decisions. In addition, the behavior of deposit rates partly explains why interest rates capping was imposed in Kenya in 2016.

Download Full-text

Spillover Effects of US Monetary Policy on Banking Development: Evidence from the Asian Region

Global Business Review ◽

10.1177/0972150919857486 ◽

2019 ◽

pp. 097215091985748 ◽

Cited By ~ 1

Author(s):

Hamed Ahmad Almahadin

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Banking Sector ◽

Banking Industry ◽

Spillover Effects ◽

Interest Rate Risk ◽

Asian Countries ◽

Interest Rate Volatility ◽

The Us ◽

Banking Development

This study investigates the dynamic impacts of local interest rate volatility and the spillover effects of the US policy rate on the banking development of Asian countries from 1980 to 2015. Bounds testing within the autoregressive distributed lag (ARDL) framework is employed to explore the long-term and short-term impacts. In addition, the study adopts a principal components analysis to create a comprehensive index for banking development to capture the major dimensions of the banking development concept. The empirical findings indicate that local interest rate volatility has negative impacts on the banking industry of Asian countries. Moreover, the existence of the negative spillover impact of the US policy rate on the banking development proxy is revealed in the sampled countries. These impacts continue to play a significant role in dampening the path of banking sector development. Therefore, the banking industry of Asian countries seems to be vulnerable to interest rate risk. The results could provide important implications for policymakers to improve the banking systems of Asian economies. Bankers must consider the impacts of local interest rate policies, as well as the role of US interest rates.

Download Full-text

Is the High Interest Rate Combined with Intense Deleveraging Campaign Desirable? A Collateral Mechanism under Stringent Credit Constraints

Sustainability ◽

10.3390/su10124803 ◽

2018 ◽

Vol 10 (12) ◽

pp. 4803 ◽

Cited By ~ 1

Author(s):

Qiuyi Yang ◽

Youze Lang ◽

Changsheng Xu

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Banking Sector ◽

Housing Prices ◽

Policy Implications ◽

Shadow Banking ◽

High Interest Rate ◽

Asset Bubbles ◽

Collateral Constraints ◽

High Level

Recently, China has witnessed a continuously increasing Debt-to-GDP ratio and a vigorously expanding shadow banking sector. Housing prices hovering at a high level seriously affect the lives of ordinary residents. Disappointingly, a variety of activities such as intense deleveraging campaigns and tight monetary controls produce little effect. Why do these seemingly rightful implementations hardly work? What should governments do to stop the incessant expansion of asset bubbles? What role ought financial supervisors to play in regulating credit markets and facilitating a sustainable and inclusive economic growth? This paper sets off from the pledgeability of asset bubbles and constructs a generalized overlapping generation (OLG) model incorporating financial frictions and collateral constraints, in order to explore the bubble evolution under the alterations of market interest rates and credit conditions. The results show a unique bubble equilibrium, in which the steady-state bubble size expands when interest rate increases. Numerical results further reveal that the bubble-inflation effect of a higher interest rate is reinforced by a more stringent collateral constraint. Our research contributes to an explanation of the inefficacy of present policies and provides the following policy implications: The combination of an interest rate elevation and a strong loan restriction is in fact undesirable for suppressing asset bubbles. Not merely does it strike productivity and capital formation, but it also fosters investors to hold more risky assets to solve liquidity shortage under constrained borrowing capacity.

Download Full-text

Bank competition and interest rate pass-through in the BRICS

International Journal of Emerging Markets ◽

10.1108/ijoem-05-2011-0046 ◽

2014 ◽

Vol 9 (4) ◽

pp. 471-487 ◽

Cited By ~ 3

Author(s):

Gideon Fadiran

Keyword(s):

South Africa ◽

Interest Rate ◽

Interest Rates ◽

Research Output ◽

Central Banking ◽

Deposit Rate ◽

Content Type ◽

Reaction Theory ◽

Pass Through ◽

Customer Reaction

Purpose – The purpose of this paper is to examine and compare the interest rate pass-through among the Brazil, Russia, India, China and South Africa (BRICS) emerging markets. Design/methodology/approach – The paper reviews a general literature on interest rates pass-through by applying a cointegration and asymmetric mean adjustment lag (MAL) error correction methodology (ECM). Findings – A symmetric adjustment is found in Russia, China and South Africa's deposit rate, while an asymmetric adjustment is found in Brazil and India's deposit rate adjustments. The presence of a customer reaction theory is found in Brazil, India, China and South Africa's deposit rate adjustments, while a collusive pricing arrangement is found in Russia. From the lending rate adjustment, a collusive pricing arrangement was found in Brazil, China and South Africa, while a customer reaction theory was found in India and Russia. Research limitations/implications – The sample period used in the study covers a period starting from the formal recognition of BRIC (2001-2010), which limits the data length. Practical implications – The research output and implication can assist monetary policy makers, investors and consumers to monitor BRICS’ central banking, commercial banking and competition behaviour, individually and as a group. The BRICS are potentially heading towards a more financially integrated bloc as multilateral agreements among members increases. This is in the form of Letters of Credit and Memorandum of Understanding. These agreements should boost intra-BRICS financial transactions, investments and trade. Originality/value – This is, to the best of knowledge, the first analysis of BRICS interest rate pass-through using the asymmetric MAL ECM application.

Download Full-text

Banking: Interest Spread, Inelastic Deposit Supply, and Mergers

The Pakistan Development Review ◽

10.30541/v45i4iipp.1055-1070 ◽

2006 ◽

Vol 45 (4II) ◽

pp. 1055-1070 ◽

Cited By ~ 1

Author(s):

M. Idrees Khawaja ◽

Musleh-Ud Din

Keyword(s):

Monetary Policy ◽

Banking Sector ◽

Developing Economies ◽

Bank Lending ◽

Bank Lending Channel ◽

Treasury Bills ◽

Lending Channel ◽

Lending Rates ◽

The Difference ◽

Pass Through

Interest spread, the difference between what a bank earns on its assets and what it pays on its liabilities, has been on an upward trend during the last few years: during 2005 the average interest spread of the banking sector has increased by 2.14 percent. An increase in the interest spread implies that either the depositor or the borrower or both stand to loose. In the context of developing economies, the lack of alternate avenues of financial intermediation aggravates the adverse impact of increase in spread.1 Interest spread also has implications for the effectiveness of the bank lending channel. For example, with a commitment to market based monetary policy, the central bank influences the yield on treasury bills (T. bill hereafter) that in turn affects the deposit and lending rates.2 The change in these rates influences the cost of capital that in turn affects the level of consumption and investment in the economy. If the pass-through of the changes in yield on T. bill rate to the deposit and lending rates is asymmetric then this changes the spread, for better or worse, depending upon the nature of asymmetry. If the increase in spread is due to lower return to depositors then this discourages savings; alternatively if it is due to higher charge on loans, investment decisions are affected. In either case the increase in spread has an adverse bearing upon the effectiveness of bank lending channel of monetary policy and has therefore important implications for the economy......

Download Full-text

THE DETERMINANTS OF INTEREST RATE SPREAD AMONG COMMERCIAL BANKS IN KENYA

International Journal of Finance and Accounting ◽

10.47604/ijfa.446 ◽

2017 ◽

Vol 2 (5) ◽

pp. 29

Author(s):

Leah Njoroge ◽

Mercy Warui ◽

Catherine Mbogo ◽

Margaret Chiera ◽

Dr. Chogii

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Market Structure ◽

Significant Relationship ◽

Commercial Banks ◽

Banking Sector ◽

Unique Contribution ◽

High Interest Rate ◽

Interest Rate Spread ◽

The Interest Rate

Purpose: To establish the determinants of interest rate spread among commercial banks in Kenya. Methodology: The study utilized a descriptive survey research design. Findings: The results indicated that the commercial banking sector has witnessed a gradual rise in the Interest rate spread. Results also showed that the mean of market structure has been fluctuating with year (2010) being the lowest with mean of 4 and year (2012) being the highest with mean 12. Results also showed that there was no regulation from the year (2005) to the year (2009) but it was later adopted whereas regulations shoot steadily to mean of 1.0 in the year (2009) and remained in the same level the rest of the years. The regression results indicate that there is a positive and significant relationship between market structure, credit risk and interest spread. The regression results also indicated that there is a positive but insignificant relationship between access to information and interest spread. Further, the results indicated that there is a negative and significant relationship between regulation and interest spread. Unique contribution to theory, practice and policy: The study is important to the management of Commercial banks as it will provide an insight on the factors influencing interest rate spread among commercial banks in Kenya. The results of this study will provide information to policy makers and other stakeholders in the financial sector (especially the banks) to come up with strategies that help in dealing with the high interest rate spread experience in the banking sector and thus improve on the financial performance of the organisations. It may be used as a tool for persuading commercial banks to reduce their interest rates spread and hence increase their volume of business, which of course would compensate the loss in the interest rate spread. The study will also be invaluable to the government and CBK. This is because the monetary policy framework of Central Bank of Kenya and its implementation will be guided by a need to ensure, among others: realistic interest rate spreads that encourage financial deepening and a safe, sound, efficient and competitive banking system through discreet risk management. These findings therefore might influence the effectiveness of economic policies. The research results will also be important to scholars and researchers as it will add to the existing pool of knowledge.

Download Full-text

Effects of the financial crisis and low interest rate environment on interest rate pass-through in Czech Republic, Hungary and Romania

Acta Oeconomica ◽

10.1556/032.2021.00039 ◽

2021 ◽

Vol 71 (4) ◽

pp. 551-567

Keyword(s):

Czech Republic ◽

Interest Rate ◽

Financial Crisis ◽

Interest Rates ◽

Weighted Average ◽

Real Economy ◽

Cointegration Tests ◽

Rate Environment ◽

Prime Rate ◽

Pass Through

Abstract In order for monetary policy’s interest rate channel to operate smoothly and effectively, the relevant retail interest rates of the real economy should react quickly and follow the movements of the prime rate. It has been observed that this connection has weakened since the financial crisis and it was suggested that the so called Weighted Average Cost of Liabilities (WACL) might be a better proxy for the banks’ marginal costs than the prime rate or interbank rate. In this study the WACL for Czech Republic, Hungary and Romania is calculated by applying cointegration tests and ARDL models. I examined whether their long-run relationships with the retail loan rates are more stable. Results: 1. Using the WACL instead of the interbank rate yields slightly more stable long-term relationships with the retail loan rates, and the WACL has been proved to be somewhat more stable than the interbank rate. 2. The interest rate pass-through has been efficient for the household loan rates in all three countries, but only in Romania for the corporate loan rates. 3. The results suggest that the central banks can effectively influence the commercial banks’ financing costs even in a low interest rate environment, although this cost represents only one component of the loan rates, and the movements of other components can offset the changes of the prime rate.

Download Full-text