Bank Lending Rates and Financial Structure in Italy: A Case Study

Abstract

This is a Working Paper and the author(s) would welcome any comments on the present text. Gtations should refer to a Working Paper of the International Monetary Fund, mentioning the author(s), and the date of issuance. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.

How do banks set interest rates?

“…The reaction of the short term lending rate is higher with respect to previous studies on the Italian case and this calls for an increase in competition after the introduction of the 1993 Banking Law. Cottarelli et al (1995), analyzing the period 1986:02-1993:04, find that the immediate pass through is of around 0.2, while the effect after three months is 0.6 per cent. Their long run elasticity is equal to 0.9 per cent but also in their model the null hypothesis of a complete pass-through in the long run is accepted.…”

“…Another explanation is the presence of compulsory reserves. To analyze this, we can refer to the theoretical elasticity in the case 24 The main differences between Cottarelli et al (1995) and this paper are three. First, they use the Treasury bill rate as the reference monetary interest rate.…”

“…For example, there is evidence that in the eighties Italian banks were comparatively slow in adjusting their rates (Verga, 1984;Banca d'Italia, 1986Cottarelli and Kourelis, 1994) but important measures of liberalization of the markets and deregulation over the last two decades should have influenced the speed at which changes in the money market conditions are transmitted to lending and deposit rates (Cottarelli et al 1995;Passacantando, 1996;Ciocca, 2000;Angelini and Cetorelli, 2002).…”

“…Third, their dataset is based on monthly data. To allow comparability among the results of this paper and those in Cottarelli et al (1995) I have: 1) checked the results to different monetary policy indicators (i.e. the interbank rate; see Section 6); 2) excluded the macro variables from equation (1) to verify if the results were sensitive to their inclusion.…”

Regional Interest Rate Pass-Through in Italy

“…Their main finding is that the asymmetric reaction of banks to tightening and easing of monetary policy disappeared in Italy after the introduction of the 1993 Consolidating Law on Banking. Cottarelli et al (1995) address the determination of bank lending rates in Italy during the period [1987][1988][1989][1990][1991][1992][1993]. Utilizing data from 63 banks they report that the stickiness of Italian lending rates was higher than in other countries.…”