The divergence of bank lending rates from policy rates after the financial crisis: The role of bank funding costs

Illes, Anamaria; Lombardi, Marco J.; Mizen, Paul

Abstract

After the global financial crisis, policy rates were cut to near-zero levels, yet, bank lending rates did not fall as much as the decline in policy rates would have suggested. If the crisis represents a structural break in the relationship between monetary policy and lending rates, how should central banks view the post-crisis transmission? This poses a major puzzle for monetary policymakers. Using a new weighted average cost of liabilities to measure banks’ effective funding costs we show a model of interest rate pass-through with dynamic panel data methods solves this puzzle, and has many other advantages over traditional approaches. It confirms central banks should focus on the cost and composition of bank liabilities, as many are now doing, to better understand and steer the dynamics of lending rates.

Citation

Illes, A., Lombardi, M. J., & Mizen, P. (2019). The divergence of bank lending rates from policy rates after the financial crisis: The role of bank funding costs. Journal of International Money and Finance, 93, 117-141. https://doi.org/10.1016/j.jimonfin.2019.01.003

• Journal Article Type: Article
• Acceptance Date: Jan 14, 2019
• Online Publication Date: Jan 17, 2019
• Publication Date: 2019-05
• Deposit Date: Jan 30, 2019
• Publicly Available Date: Jul 18, 2020
• Journal: Journal of International Money and Finance
• Print ISSN: 0261-5606
• Electronic ISSN: 1873-0639
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 93
• Pages: 117-141
• DOI: https://doi.org/10.1016/j.jimonfin.2019.01.003
• Keywords: Economics and Econometrics; Finance
• Public URL: https://nottingham-repository.worktribe.com/output/1505902
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0261560619300300
• Additional Information: This article is maintained by: Elsevier; Article Title: The divergence of bank lending rates from policy rates after the financial crisis: The role of bank funding costs; Journal Title: Journal of International Money and Finance; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.jimonfin.2019.01.003; Content Type: article; Copyright: © 2019 Elsevier Ltd. All rights reserved.
• Contract Date: Jan 30, 2019