A Model of Building Society Interest Rate Setting

Abstract

This paper examines the interest rate setting behaviour of building societies since the breakdown of the interest rate cartel in 1984. Societies have faced increasing competition in the mortgage and savings market over this period, against a backdrop of radical regulatory change.

The paper develops a profit-maximising model of societies on which econometric analysis is based. The empirical analysis indicates that libor drives the pricing on both sides of the balance sheet. The performance of the estimated equations was good, given the regulatory and behavioural change of the institutions and the turbulence of the housing market over this period. It is interesting that real side variables - such as house price volatility and unemployment - were found to be insignificant.

JEL Classification: E43, G12