Pass-Through of Bank Funding Costs to Lending and Deposit Rates: Lessons from the Financial Crisis

Abstract

A key feature of the financial crisis was that the cost to banks of unsecured term funding rose sharply relative to expected policy rates and did so heterogeneously across banks. This paper examines the pass-through of bank funding costs to retail loan and deposit rates in the United Kingdom, and how this changed during and after the financial crisis. We estimate separate equations for individual banks and find that the common component of funding costs passes through quickly and completely. But cost changes that are not homogeneous across banks generally exhibit slower pass-through, and are affected by the state of market competition.

Keywords: Transmission mechanism, interest rate pass through

JEL Classification: C23, E43, E51, E52