Understanding the Price of New Lending to Households

11 Pages Posted: 22 Sep 2010

See all articles by Richard Button

Richard Button

Bank of England

Silvia Pezzini

Hong Kong Monetary Authority

Neil Rossiter

Bank of England - Monetary Analysis

Date Written: September 20, 2010

Abstract

During the recent financial crisis Bank Rate was reduced sharply, but in general the interest rates charged on new lending to households did not fall by as much and indeed some interest rates rose. This article assesses the factors that have influenced new lending rates using a simple decomposition of new lending rates into lenders’ funding costs, credit risk charges and a residual (which includes both operating costs and the mark-up). Applying the decomposition to two indicative lending products suggests that funding costs have been an important driver of new lending rates and the residual has also risen. The residual needs to be interpreted with caution — by definition it reflects all the remaining unmodelled factors. But among other things, a larger residual is consistent with lenders increasing mark-ups over marginal costs for new lending, which may reflect a need to build higher capital levels within the banking sector.

Suggested Citation

Button, Richard and Pezzini, Silvia and Rossiter, Neil, Understanding the Price of New Lending to Households (September 20, 2010). Bank of England Quarterly Bulletin 2010 Q3. Available at SSRN: https://ssrn.com/abstract=1680326

Richard Button

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Silvia Pezzini

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

Neil Rossiter (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
192
Abstract Views
1,188
rank
160,148
PlumX Metrics