The pass-through from market interest rates to bank lending rates in Germany

The terms and conditions on which bank loans are made to non-financial firms and households play a key role in the transmission of monetary policy. This paper analyses the relationship between German bank lending rates and both money market and capital market rates in the 1990s. This study reveals evidence of structural differences in the interest rate pass-through across German banks. The speed at which bank lending rates adjust to changes in market rates is related to a credit institution's size, its refinancing conditions and the extent of its business with non-banks. Large banks and banks with few savings deposits adjust their lending rates to market terms more quickly than other banks, possibly because their scope for setting interest rates is comparatively narrow. A fairly small amount of long-term business with non-bank customers, indicating the importance of relationship banking, also leads to a faster lending rate pass-through. In the short run, lending rates are stickier for banks that are largely able to cover their long-term loans to non-banks by corresponding deposits from such clients. Finally, the lending rates charged on corporate loans at a number of banks – especially those for current account credit – respond only gradually to changes in market rates. By smoothing their rates, banks appear to accept temporary fluctuations in their loan mark-up. This, in turn, tends to retard monetary policy transmission via bank rates. In the long-run relationship between lending and market rates, however, apart from a constant bank-specific mark-up, there are, in most cases, no differences across banks. This suggests that a similar long-run pass-through obtains for all interest rate reporting banks, irrespective of the adjustment process. -- Den Kreditkonditionen von Banken kommt eine bedeutende Rolle im geldpolitischen Transmissionsprozess zu. Die vorliegende empirische Studie untersucht den Zusammenhang zwischen Kreditzinsen deutscher Banken und den Bedingungen am Geld- und Kapitalmarkt in den neunziger Jahren. Die präsentierten Schätzungen unterstreichen, dass sich die Zinsreaktionen verschiedener Kreditinstitute strukturell unterscheiden. Die Studie zeigt, dass das Anpassungstempo der Kreditzinsen an veränderte Marktzinsen von der Größe der Banken, ihren Refinanzierungsbedingungen und der Bedeutung ihres Nichtbankengeschäfts abhängt. Große Institute und Banken mit einer geringen Refinanzierung durch Spareinlagen passen ihre Kreditzinsen schneller als andere Institute an Marktzinsen an, was auf einen geringeren Zinssetzungsspielraum zurückgeführt werden kann. Sind die langfristigen Einlagen- und Kreditgeschäfte mit Nichtbanken, die als Indikator für das Relationship Banking des Instituts herangezogen werden, vergleichsweise moderat, so geht dies ebenfalls mit einer zügigen Zinsreaktion einher. Bestehen dagegen starke Beziehungen zwischen der Bank und ihren Kunden, so kann sich die Bank eine verzögerte Zinsanpassung eher leisten. Schließlich reagieren Kreditzinsen derjenigen Banken in der kurzen Frist träger auf Marktzinsänderungen, die ihre längerfristigen Nichtbankenkredite großenteils durch entsprechende Nichtbankeneinlagen finanzieren können. Vor allem bei Unternehmenskrediten und hierunter besonders bei Kontokorrentkrediten reagieren die Kreditzinsen einer Reihe von Banken nur schrittweise auf veränderte Marktzinsen. Durch die Zinsglättung nehmen diese Institute vorübergehende Schwankungen ihres Zinsabstands zum Marktzins in Kauf. Dadurch verzögert sich der geldpolitische Transmissionsprozess über Bankzinsen. Sieht man von einem bankspezifischen, zeitkonstanten Zinsabstand ab, so bestätigen sich Unterschiede in der langfristigen Beziehung zwischen Kredit- und Marktzinsen in den meisten Fällen nicht. Das spricht dafür, dass alle zinsmeldenden Banken trotz unterschiedlicher Anpassungsverläufe langfristig ein ähnliches Anpassungsniveau erreichen.

The pass-through from market interest rates to bank lending rates in Germany

The terms and conditions on which bank loans are made to non-financial firms and households play a key role in the transmission of monetary policy. This paper analyses the relationship between German bank lending rates and both money market and capital market rates in the 1990s. This study reveals evidence of structural differences in the interest rate pass-through across German banks. The speed at which bank lending rates adjust to changes in market rates is related to a credit institution's size, its refinancing conditions and the extent of its business with non-banks. Large banks and banks with few savings deposits adjust their lending rates to market terms more quickly than other banks, possibly because their scope for setting interest rates is comparatively narrow. A fairly small amount of long-term business with non-bank customers, indicating the importance of relationship banking, also leads to a faster lending rate pass-through. In the short run, lending rates are stickier for banks that are largely able to cover their long-term loans to non-banks by corresponding deposits from such clients. Finally, the lending rates charged on corporate loans at a number of banks - especially those for current account credit - respond only gradually to changes in market rates. By smoothing their rates, banks appear to accept temporary fluctuations in their loan mark-up. This, in turn, tends to retard monetary policy transmission via bank rates. In the long-run relationship between lending and market rates, however, apart from a constant bank-specific mark-up, there are, in most cases, no differences across banks. This suggests that a similar long-run pass-through obtains for all interest rate reporting banks, irrespective of the adjustment process.Den Kreditkonditionen von Banken kommt eine bedeutende Rolle im geldpolitischen Transmissionsprozess zu. Die vorliegende empirische Studie untersucht den Zusammenhang zwischen Kreditzinsen deutscher Banken und den Bedingungen am Geld- und Kapitalmarkt in den neunziger Jahren. Die präsentierten Schätzungen unterstreichen, dass sich die Zinsreaktionen verschiedener Kreditinstitute strukturell unterscheiden. Die Studie zeigt, dass das Anpassungstempo der Kreditzinsen an veränderte Marktzinsen von der Größe der Banken, ihren Refinanzierungsbedingungen und der Bedeutung ihres Nichtbankengeschäfts abhängt. Große Institute und Banken mit einer geringen Refinanzierung durch Spareinlagen passen ihre Kreditzinsen schneller als andere Institute an Marktzinsen an, was auf einen geringeren Zinssetzungsspielraum zurückgeführt werden kann. Sind die langfristigen Einlagen- und Kreditgeschäfte mit Nichtbanken, die als Indikator für das Relationship Banking des Instituts herangezogen werden, vergleichsweise moderat, so geht dies ebenfalls mit einer zügigen Zinsreaktion einher. Bestehen dagegen starke Beziehungen zwischen der Bank und ihren Kunden, so kann sich die Bank eine verzögerte Zinsanpassung eher leisten. Schließlich reagieren Kreditzinsen derjenigen Banken in der kurzen Frist träger auf Marktzinsänderungen, die ihre längerfristigen Nichtbankenkredite großenteils durch entsprechende Nichtbankeneinlagen finanzieren können. Vor allem bei Unternehmenskrediten und hierunter besonders bei Kontokorrentkrediten reagieren die Kreditzinsen einer Reihe von Banken nur schrittweise auf veränderte Marktzinsen. Durch die Zinsglättung nehmen diese Institute vorübergehende Schwankungen ihres Zinsabstands zum Marktzins in Kauf. Dadurch verzögert sich der geldpolitische Transmissionsprozess über Bankzinsen. Sieht man von einem bankspezifischen, zeitkonstanten Zinsabstand ab, so bestätigen sich Unterschiede in der langfristigen Beziehung zwischen Kredit- und Marktzinsen in den meisten Fällen nicht. Das spricht dafür, dass alle zinsmeldenden Banken trotz unterschiedlicher Anpassungsverläufe langfristig ein ähnliches Anpassungsniveau erreichen

Wealth and asset price effects on economic activity

Do asset prices affect real activity? This question has taken on a new importance in recent years, as asset values first surged at the end of 1990s and, thereafter, dramatically retreated. This report reviews the available theoretical and empirical evidence regarding asset price and wealth effects in Europe and some other major economies. The main focus of this report is on consumption effects via the wealth channel, reflecting the bulk of literature on the effects of asset prices. However, asset price effects on investment via the Tobin’s-Q channel, balance sheet and confidence channels are also reviewed. The available evidence supports the view that the wealth channel is the most important of various channels. There is little empirical evidence indicating that the Tobin’s-Q, balance-sheet and confidence channels play any major independent role in the transmission of asset price effects to economic activity.household wealth, wealth channel, asset price, marginal propensity to consume, cost of capital.

Money, Finance and Demography: The Consequences of Ageing

A significant ageing trend can be observed in Europe and in other parts of the world. Fertility is decreasing and life expectancy increasing. The impact of migration is growing. The book deals with the implications for financial markets of these demographic trends. Leading economists and financial experts from Europe and the United States evaluate the challenges to public pension systems and the private pension industry. Based on long-term projections of productivity and employment they look at potential growth in GDP per capita and implications for savings and wealth. Pension fund portfolio management is discussed together with the ability of capital markets to serve retirement-financing purposes. Fiscal as well as financial sustainability are analysed in depth. The roles of global imbalances and international capital movements are included. Most chapters also discuss policy implications - in particular with regard to how pension saving incentives and rules and incentives for retirement should be in order to ensure fiscal and financial sustainability. All contributions in the book are based on presentations at the 26th SUERF Colloquium on "Money, Finance and Demography - the Consequences of Ageing" held on 12-14 October, 2006 in Lisbon sponsored by Banco de Portugal and Millennium bcp and in cooperation with the Universidade Nova de Lisboa.

Redemptions and asset liquidations in corporate bond funds

Mutual funds' exposure to corporate bonds has brought concerns about risks arising from liquidity transformation back to the fore. With a focus on fund asset liquidity and investors, this paper explores the flow-performance relationship and the liquidity management of funds in the presence of net redemptions. We highlight the response of fund liquidity because the vulnerability to outflows is found to depend on asset liquidity and fund ownership. We construct a unique panel of German corporate bond funds by merging data on asset liquidity with information on fund ownership. First, conditional on underperformance, illiquid funds dominated by retail investors are more exposed to outflows than illiquid funds primarily owned by institutional investors. Large investors are reluctant to withdraw most likely because they internalise the fire-sale-driven loss that a withdrawal inflicts on an illiquid fund. Within institutional-oriented funds, the flow response to bad performance is only significant if fund assets are sufficiently liquid. Second, the way that fund managers liquidate their bonds to meet redemptions is found to differ across ownership structures and depends on the degree of macroeconomic uncertainty: in times of high uncertainty, managers of institutional-oriented funds sell bonds in a liquidity pecking order style, thereby preserving short-term performance. At the same time, retail-based funds do not let portfolio liquidity deteriorate - presumably to attenuate incentives for runs

Banks' holdings of risky sovereign bonds in the absence of the nexus: Yield seeking with central bank funding or de-risking?

For the largest 55 German banks, we detect the presence of countercyclical yield seeking in the form of acquisition of high-yielding periphery bonds in the period from Q1 2008 to Q2 2011. This investment strategy is pursued by banks not subject to a bailout, banks characterised by high capitalisation, banks that rely on short-term wholesale funding, and trading banks. In the subsequent period up to 2014, these banks switched to a procyclical divestment strategy resulting in the sale of risky assets. Following the launch of the public sector purchase programme (PSPP) in 2015, a clear investment pattern can no longer be identified. Unlike existing evidence for banks domiciled in vulnerable countries, we find that the recourse to central bank finance is rather limited and does not affect the risk-taking behaviour of banks in the non-stressed country Germany. Yield-seeking strategies were predominantly pursued by healthy banks in Germany. This contrasts with the increases in domestic sovereign holdings in vulnerable countries which can be primarily regarded as the result of moral suasion or, for weakly capitalised banks, a kind of "indirect" moral suasion or "home-biased" gambling for resurrection

Banks' holdings of risky sovereign bonds in the absence of the nexus: Yield seeking with central bank funding or de-risking?

For the largest 55 German banks, we detect the presence of countercyclical yield seeking in the form of acquisition of high-yielding periphery bonds in the period from Q1 2008 to Q2 2011. This investment strategy is pursued by banks not subject to a bailout, banks characterised by high capitalisation, banks that rely on short-term wholesale funding, and trading banks. In the subsequent period up to 2014, these banks switched to a procyclical divestment strategy resulting in the sale of risky assets. Following the launch of the public sector purchase programme (PSPP) in 2015, a clear investment pattern can no longer be identified. Unlike existing evidence for banks domiciled in vulnerable countries, we find that the recourse to central bank finance is rather limited and does not affect the risk-taking behaviour of banks in a non-stressed country such as Germany. Yield-seeking strategies were predominantly pursued by strong banks in Germany. Thus, with respect to the increases in domestic sovereign holdings in vulnerable countries, we instead presume moral suasion and, for weakly capitalised banks, a kind of "hidden moral suasion" or "home-biased" gambling for resurrection to actively push the sovereign-bank nexus. These policies were flanked by an expansionary monetary policy and regulation with no capital adequacy requirements for euro area sovereign bonds

Redemptions and Asset Liquidations in Corporate Bond Funds

Mutual funds' exposure to corporate bonds has brought concerns about risks arising from liquidity transformation back to the fore. With a focus on fund asset liquidity and investors, this paper explores the flow-performance relationship and the liquidity management of funds in the presence of net redemptions. We highlight the response of fund liquidity because the vulnerability to outflows is found to depend on asset liquidity and fund ownership. We construct a unique panel of German corporate bond funds by merging data on asset liquidity with information on fund ownership. First, conditional on underperformance, illiquid funds dominated by retail investors are more exposed to outflows than illiquid funds primarily owned by institutional investors. Large investors are reluctant to withdraw most likely because they internalise the fire-sale-driven loss that a withdrawal inflicts on an illiquid fund. Within institutional-oriented funds, the flow response to bad performance is only significant if fund assets are sufficiently liquid. Second, the way that fund managers liquidate their bonds to meet redemptions is found to differ across ownership structures and depends on the degree of macroeconomic uncertainty: in times of high uncertainty, managers of institutional-oriented funds sell bonds in a liquidity pecking order style, thereby preserving short-term performance. At the same time, retail-based funds do not let portfolio liquidity deteriorate - presumably to attenuate incentives for runs