How Do Banks Set Interest Rates

By L. Gambacorta. 2008

549 citations recorded by the source corpus.

The aim of this paper is to study cross-sectional differences in banks interest rates. It adds to the existing literature in two ways. First, it analyzes in a systematic way both micro and macroeconomic factors that influence the price setting behavior of banks. Second, by using banks' prices (rather than quantities) it provides an alternative way to disentangle loan supply from loan demand shift in the bank lending channel' literature. The results, derived from a sample of Italian banks, suggest that heterogeneity in the banking rates pass-through exists only in the short run. Consistently with the literature for Italy, interest rates on shortterm lending of liquid and well-capitalized banks react less to a monetary policy shock. Also banks with a high proportion of long-term lending tend to change their prices less. Heterogeneity in the pass-through on the interest rate on current accounts depends mainly on banks' liability structure. Bank's size is never relevant.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/909c912760e5fffe4b2202f52202b1b694c77240

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Citations in the corpus

Mending the broken link: Heterogeneous bank lending rates and monetary policy pass-through (2020, background): “Gambacorta (2005, 2008) confirms these findings using a sample of Italian banks.”
The financial accelerator in an evolving credit network (2010, background): “Since these banks are more exposed to asymmetric information problems they have less capacity to shield credit relationships in the case of a monetary tightening, and they should cut their their supplied loans and raise the interest rate by a larger amount’’ (Gambacorta, 2008, p. 798).”
Determinants of Bank Interest Margins: Impact of Maturity Transformation (2015, background): “Gambacorta and Mistrulli (2004), and Gambacorta (2008) employ a similarly detailed IRR measure based on maturity ladders of different assets and liabilities.”