Why Did Bank Lending Rates Diverge from Policy Rates after the Financial Crisis?

33 Pages Posted: 13 Feb 2015

See all articles by Annamaria Illes

Annamaria Illes

Bank for International Settlements (BIS)

Marco J. Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department

Paul Mizen

University of Nottingham; Bank of England; Centre for Economic Policy Research (CEPR)

Date Written: February 2015

Abstract

The global finance crisis prompted central banks in many countries to cut short-term policy rates to near zero levels. Yet, lending rates did not fall as much as the decline in policy rates would have suggested. We argue that comparing lending rates to policy rates is misleading: banks do not obtain all their funds at policy rates, and after the crisis, costs of funding rose substantially. Comparing lending rates with a weighted average cost of funds suggests that banks did not substantially change their rate setting behaviour after the financial crisis: interest rate pass-through relationships across eleven countries in Europe appear to have remained stable.

Keywords: lending rates, policy rates, panel cointegration, financial crisis

JEL Classification: E43, E52, G21

Suggested Citation

Illes, Annamaria and Lombardi, Marco Jacopo and Mizen, Paul, Why Did Bank Lending Rates Diverge from Policy Rates after the Financial Crisis? (February 2015). BIS Working Paper No. 486, Available at SSRN: https://ssrn.com/abstract=2564238

Annamaria Illes (Contact Author)

Bank for International Settlements (BIS) ( email )

No Address Available

Marco Jacopo Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41612809492 (Phone)

Paul Mizen

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom
+44 115 951 5479 (Phone)
+44 115 951 4159 (Fax)

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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