1 / 19

The impact of bank competition on the interest rate pass-through in the euro area

The impact of bank competition on the interest rate pass-through in the euro area. Michiel van Leuvensteijn (Centraal Planbureau) Christoffer Kok-S ø rensen (European Central Bank) Jaap Bikker (De Nederlandsche Bank) Adrian van Rixtel (Banco de España).

glen
Download Presentation

The impact of bank competition on the interest rate pass-through in the euro area

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. The impact of bank competition on the interest rate pass-through in the euro area Michiel van Leuvensteijn (Centraal Planbureau) Christoffer Kok-Sørensen (European Central Bank) Jaap Bikker (De Nederlandsche Bank) Adrian van Rixtel (Banco de España) 11th Conference ECB-CFS Research Network, Prague, 20 October 2008. The views expressed are those of the authors and do not necessarily represent those of the CPB, ECB, DNB and BdE.

  2. Structure • What did we analyse? • How did we analyse this? • What are the results?

  3. 1. What did we analyse? • Importance of competition to pass-through: • Bank competition is likely to have an impact on both the level and the changes of bank interest rates. • The bank interest rate channel is a key element of the monetary policy transmission mechanism in the euro area.

  4. 1. What did we analyse? • What is the impact of competition on the bank interest rate pass-through? • Three questions: • Are bank loan rates lower (and deposit rates higher) in more competitive markets? • Do bank interest rates adjust stronger to changes in market rates in more competitive markets … 2a. In the long-run? 2b. In the short-run (immediate adjustment)?

  5. 1. What did we analyse? • Our contribution: • We use a new indicator to measure bank competition: The Boone indicator. • We look at both levels and changes using a (ECM) panel framework. • We look at specific product segments of the loan and deposit markets.

  6. 2. How did we analyse this? • Two major steps of analysis: • Step 1: Estimation of our measure of bank competition: The Boone indicator. • => Previous paper: “A new approach to measuring competition in the loan markets of the euro area” (NBER, Tokyo, June 2007). • Step 2: Estimation of the relationship between the Boone indicator and bank interest rates.

  7. 2a. How: The Boone indicator New approach to measure competition: Boone indicator (Jan Boone, Tilburg University; Economic Journal, 2008). • Central notion of the Boone indicator: • Competition rewards efficiency and punishes inefficiency => linkage between relative marginal costs (MC) and relative market share. • In competitive markets, efficient banks have larger market shares than inefficient banks.

  8. 2a. How: Boone indicator • Model: To obtain the Boone indicator, we need to estimate the relationship between relative market shares and relative marginal costs (MC) for each country. Thus: • ln (market shareit) = αt + βtln (MCit)+ vt • βtis the Boone indicator. • βt should be negative: Market shares increase for banks having lower marginal costs relative to their competitors. The larger (in absolute terms) the value of βt, the stronger should be competition.

  9. 2a. How: Boone indicator • Model: • Step 1: We estimate translog cost functions for all countries. • Step 2: We estimate the marginal costs (in relative terms) for all banks on the basis of these translog cost functions. • Step 3: We estimate the relationship between market share and marginal costs, which gives us the Boone indicator.

  10. 2a. How: Boone indicator • Data: • Extended Bankscope, individual bank data. • Period: 1992 – 2004. • 8 euro area countries: Austria, Belgium, France, Germany, Italy, the Netherlands, Spain and Portugal. • Total number of banks: Around 2,800.

  11. Results Boone indicator

  12. 2b. How: Boone indicator and bank interest rates. • Data: • MIR and NRIR interest rate statistics, and corresponding market interest rates. • Period: 1994-2004; monthly data. • 8 countries: AT, BE, ES, DE, FR, IT, NL, PT. • 6 types of bank products: • 4 bank loan rates: Mortgages, consumer loans, short-term and long-term loans to enterprises. • 2 bank deposit rates: Current account and time deposits.

  13. 2b. How: Boone indicator and bank interest rates. • If there is a long-run co-movement of bank and market rates (long-run pass-through) ... • then its is appropriate to model the pass-through process using an Error-Correction Model (ECM). • Test results: • All bank and market interest rates are non-stationary, according to both Im-Pesaran-Shin (2003) and Hadri (2000) tests. • Bank and market interest rates are co-integrated according to the Pedroni (1999, 2004) test.

  14. 2b. How: Boone indicator and bank interest rates. • Question 1: Loan rates lower if more competition? • Simple spread model (Section 6.2 paper): • BRi,t - MRi,t = α BIi,t + δi Di + δt Dt + µi,t • BR = Bank interest rate (both lending and deposit rates) • MR = Market interest rate • BI = Boone indicator • Di = Country dummies (suffix i for individual countries) • Dt = Monthly time dummies • Ho: Parameter of Boone indicator α < 0. • ECM (… but results not significant).

  15. 2b. How: Boone indicator and bank interest rates. • Q2a: LR pass-thr. stronger with more competition? • ECM: BRi,t = α BIi,t + βi MRi,t + γ BIi,t MRi,t + δi Di + µi,t • γ = parameter of cross term of Boone indicator times market interest rate (BIi,t MRi,t) • Ho: Parameter of cross term γ > 0. • Q2b: SR pass-thr. stronger with more competition? • ECM: ΔBRi,t = θiµi,t-1+ ηiΔMRi,t+ φBIi,tΔMRi,t + δiDi + µi,t • θiµi,t-1 = residual LR relationship, 1 month lagged. • Ho: Parameter of cross term φ > 0. • Results not significant.

  16. 3. Results: Spread model Competition effect on bank interest spread: Correct and significant negative sign Parameter Boone indicator α Rates on mortgage loans -0.030 *** Rates on consumer loans -0.075 *** Short-term rates on corporate loans -0.128 *** Long-term rates on corporate loans 0.003 Current account deposit rates -0.154 *** Time deposit rates -0.036 *** *** = 99% confidence

  17. 3. Results: Long-run ECM Competition effect on long-run pass through: Correct and significant positive sign Parameter cross term (Boone indicator times market interest rate) γ Rates on mortgage loans 0.053 *** Rates on consumer loans 0.057 *** Short-term rates on corporate loans 0.039 *** Long-term rates on corporate loans 0.046 *** Current account deposit rates 0.037 *** Time deposit rates -0.015 *** = 99% confidence

  18. 3. Results: The effects of competition on spreads Parameter of the Boone indicator α (from the spread model) times the average of the Boone indicator for 1994-2004.

  19. Conclusions • Spreads between bank interest rates and market interest rates are lower in more competitive markets than in less competitive markets. • Competition has a positive influence on the long-run bank interest rate pass-through. • Competitionhardly increases the immediate or short-run response of loan rates to changes in market rates (although weaker evidence). • Changes in the competitive landscape may have important implications for monetary policy transmission in the euro area.

More Related