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

43 Pages Posted: 6 May 2016

See all articles by Rashmi Harimohan

Rashmi Harimohan

Bank of England

Michael McLeay

Bank of England - Monetary Assessment and Strategy Division

Garry Young

National Institute of Economic and Social Research

Date Written: April 15, 2016

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

Suggested Citation

Harimohan, Rashmi and McLeay, Michael and Young, Garry, Pass-Through of Bank Funding Costs to Lending and Deposit Rates: Lessons from the Financial Crisis (April 15, 2016). Bank of England Working Paper No. 590. Available at SSRN: https://ssrn.com/abstract=2776579 or http://dx.doi.org/10.2139/ssrn.2776579

Rashmi Harimohan (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Michael McLeay

Bank of England - Monetary Assessment and Strategy Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Garry Young

National Institute of Economic and Social Research ( email )

2 Dean Trench Street
Smith Square
London, SW1P 3HE
United Kingdom

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