Large Banks, Loan Rate Markup and Monetary Policy

49 Pages Posted: 19 Feb 2015

Date Written: October 23, 2014


This paper studies the implications of introducing large monopolistic banks, which can affect macroeconomic outcomes and thus the response of monetary policy to inflation, in a model with a collateral constraint linking the borrowers’ credit capacity to the value of their durable assets. First, we find that strategic interaction generates a countercyclical loan spread, which amplifies the impact of monetary and technology shocks on the real economy. This type of financial accelerator adds up to the one due to financial frictions and is crucially related to the existence of non-atomistic banks. Second, the level of the spread and the degree of amplification are positively related to the level of entrepreneurs’ leverage, reflecting the fact that higher leverage implies greater elasticity of the policy rate to changes in loan rates, which in turn increases banks’ market power. Third, we find that amplification is stronger the more aggressive the central bank’s response to inflation, as measured by the inflation coefficient in the Taylor rule.

Keywords: large banks, bank markup, monetary policy

JEL Classification: E51, E52, G21

Suggested Citation

Cuciniello, Vincenzo and Signoretti, Federico Maria, Large Banks, Loan Rate Markup and Monetary Policy (October 23, 2014). Bank of Italy Temi di Discussione (Working Paper) No. 987, Available at SSRN: or

Vincenzo Cuciniello (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

Federico Maria Signoretti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

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