tailieunhanh - Determinants of the interest rate pass-through of banks − evidence from German loan products

Even though the Committee is not currently proposing mandatory capital charges specifically for interest rate risk in the banking book, all banks must have enough capital to support the risks they incur, including those arising from interest rate risk. If supervisors determine that a bank has insufficient capital to support its interest rate risk, they must require either a reduction in the risk or an increase in the capital held to support it, or a combination of both. Supervisors should be particularly attentive to the capital sufficiency of “outlier banks” – those whose interest rate risk in the banking book leads to an economic value decline of. | DEUTSCHE BUNDESBANK EUROSYSTEM Discussion Paper Deutsche Bundesbank No 26 2012 Determinants of the interest rate pass-through of banks -evidence from German loan products Tobias Schluter University of Cologne Ramona Busch Deutsche Bundesbank Thomas Hartmann-Wendels University of Cologne Sonke Sievers University of Cologne Discussion Papers represent the authors personal opinions and do not necessarily reflect the views of the Deutsche Bundesbank or its staff. Editorial Board Klaus Dullmann Heinz Herrmann Christoph Memmel Deutsche Bundesbank Wilhelm-Epstein-Strahe 14 60431 Frankfurt am Main Postfach 10 06 02 60006 Frankfurt am Main Tel 49 69 9566-0 Telex within Germany 41227 telex from abroad 414431 Please address all orders in writing to Deutsche Bundesbank Press and Public Relations Division at the above address or via fax 49 69 9566-3077 Internet http Reproduction permitted only if source is stated. ISBN 978-3-86558-851-7 Printversion ISBN 978-3-86558-852-4 Internetversion Abstract This article examines the loan rate-setting behavior of German banks for a large variety of retail and corporate loan products. We find that a bank s operational efficiency is priced in bank loan rates and alters interest-setting behavior. Specifically we establish that a higher degree of operational efficiency leads to lower loan markups which involve more competitive prices and smoothed interest rate-setting. This study contributes to prior literature that has been suggesting this relationship but has produced mixed findings. For the German market this relationship is unexplored. By employing stochastic frontier analysis to comprehensively capture cost efficiency we take the bank customers perspective and demonstrate the extent to which borrowers benefit from cost efficient banking. Keywords interest rate pass-through models error correction models bank effi- ciency cost efficiency stochastic frontier analysis JELclassification G21 .