The Dynamics of Bank Spreads and Financial Structure

54 Pages Posted: 19 Jan 2007

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

Christoffer Kok

European Central Bank (ECB)

Jung-Duk Lichtenberger

European Central Bank (ECB)

Date Written: January 2007

Abstract

This paper investigates the dynamics of the pass-through between market interest rates and bank interest rates in the euro area as a function of cyclical and structural differences in the financial system. We find that overall the speed of adjustment for loans is significantly faster than for deposits, and that the pass-through is especially sluggish for demand deposits and savings deposits. Bank soundness, credit risk and interest rate risk are found to exert a significant influence on the speed of pass through. We also find evidence of faster (slower) pass-through for loans (deposits) if the change in monetary policy was up (down). Overall, we find that competition among banks and competition from financial markets result in a faster bank interest rate pass-through. Finally, we find some evidence that financial innovation speeds up the pass-through for those market segments that are most directly affected by these innovations.

Keywords: monetary transmission, banks, retail rates, financial structure

JEL Classification: E43, G21

Suggested Citation

Gropp, Reint and Kok, Christoffer and Lichtenberger, Jung-Duk, The Dynamics of Bank Spreads and Financial Structure (January 2007). ECB Working Paper No. 714. Available at SSRN: https://ssrn.com/abstract=955764

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Christoffer Kok

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jung-Duk Lichtenberger

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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