The Retail Bank Interest Rate Pass-Through: The Case of the Euro Area During the Financial and Sovereign Debt Crisis

47 Pages Posted: 20 Sep 2014

See all articles by Matthieu Darracq Paries

Matthieu Darracq Paries

European Central Bank (ECB)

Diego Moccero

European Central Bank (ECB)

Elizaveta Krylova

European Central Bank (ECB)

Claudia Marchini

European Central Bank (ECB)

Date Written: August 13, 2014

Abstract

This paper analyses the cross-country heterogeneity in retail bank lending rates in the euro area and presents newly developed pass-through models that account for the riskiness of borrowers, the balance sheet constraints of lenders and sovereign debt tensions affecting interest rate-setting behaviour. Country evidence for the four largest euro area countries shows that downward adjustments in policy rates and market reference rates have translated into a concomitant reduction in bank lending rates. In the case of Spain and Italy, however, sovereign bond market tensions and a deteriorating macroeconomic environment have put upward pressure on composite lending rates to non-financial corporations and households. At the same time, model simulations suggest that higher lending rates have propagated to the broader economy by depressing economic activity and inflation. As a response to increasing financial fragmentation, the ECB has introduced several standard and non-standard monetary policy measures. These measures have gone a long way towards alleviating financial market tensions in the euro area. However, in order to ensure the adequate transmission of monetary policy to financing conditions, it is essential that the fragmentation of euro area credit markets is reduced further and the resilience of banks strengthened where needed. Simulation analysis confirms that receding financial fragmentation could help to boost economic activity in the euro area in the medium term.

Keywords: bank lending rates, pass-through models, DSGE models, financial fragmentation, monetary policy

JEL Classification: E43, E44, E52, C22, C52, C53

Suggested Citation

Darracq Paries, Matthieu and Moccero, Diego and Krylova, Elizaveta and Marchini, Claudia, The Retail Bank Interest Rate Pass-Through: The Case of the Euro Area During the Financial and Sovereign Debt Crisis (August 13, 2014). ECB Occasional Paper No. 155, Available at SSRN: https://ssrn.com/abstract=2479833 or http://dx.doi.org/10.2139/ssrn.2479833

Matthieu Darracq Paries (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+496913446631 (Phone)
+496913447604 (Fax)

Diego Moccero

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Elizaveta Krylova

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Claudia Marchini

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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