The Dynamics of Bank Spreads and Financial Structure

Abstract

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.

Determinants of Bank Deposits in Ghana: Does Interest Rate Liberalization Matters?

“…[12] established that concentrated markets banks are slower to raise interest rates on deposits in reaction to increasing market interest rates but are faster to decrease them in reaction to failing market interest rates (p. 944). This was confirmed by [8].…”

“…[7] supported lower deposit interest rates due to factors such as higher profit by banks at the expense of consumer welfare. In similar sphere [8] find less favorable pricing to consumers due to the fact that banks may find it easier to collude. In respect to competitive imperfection, [9] indicated competitive imperfections in markets leads to lower deposits rate.…”

“…It argues that a concentrated structure increases the overall efficiency of the banking sector, hence banks price their deposits more competitively and the end effect is higher deposit rates in more concentrated markets [8] [9]. Also a researched [14] investigated bank deposit products in the Spanish market.…”

Interest rate pass-through in the EMU – New evidence from nonlinear cointegration techniques for fully harmonized data

“…For deposit rates, this scheme is reversed. This finding is supported by Gropp et al (2007) who use a panel model for the individual euro area countries and draw the same conclusion. Comparable evidence of 7 asymmetric interest rate setting is found by Karagiannis et al (2010).…”

“…This view is supported by Gropp et al (2007) and van Leuvensteijn et al (2008). Van Leuvensteijn et al (2008) estimate a dynamic panel model for eight EMU countries and investigate the PT to loan as well as deposit rates.…”