How Do Banks Set Interest Rates?

Leonardo Gambacorta

No 542, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: 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 systematically the micro and macroeconomic factors that influence the price-setting behaviour of banks. Second, by using banks� prices (rather than quantities) it provides an alternative way of disentangling 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, interest rates on short-term lending of liquid and well-capitalized banks react less to changes in money market rates. Also banks with a high proportion of long-term lending tend to modify their prices less. Heterogeneity in the pass-through on the interest rate on current accounts depends mainly on banks� liability structure. Bank size is never relevant.

Keywords: monetary policy transmission; interest rates; bank lending channel (search for similar items in EconPapers)
JEL-codes: E44 E51 E52 (search for similar items in EconPapers)
Date: 2005-02
New Economics Papers: this item is included in nep-cfn and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.bancaditalia.it/pubblicazioni/temi-disc ... 05-0542/tema_542.pdf (application/pdf)

Related works:
Journal Article: How do banks set interest rates? (2008)
Working Paper: How Do Banks Set Interest Rates? (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_542_05

Access Statistics for this paper

More papers in Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area Contact information at EDIRC.
Bibliographic data for series maintained by ().