Determinants of Belgian bank lending intrest rates

Abstract

This article first reviews the main determinants of bank loans’ interest rates and offers a brief discussion of the impact of capital requirements on interest rate margins. Next, it presents some empirical evidence, first, on the pass-through of the central bank rate to market rates and, subsequently, on the pass-through of market rates to retail interest rates using survey data for Belgian credit institutions. As predicted by economic theory, the size and significance of the pass-through of monetary policy impulses to market rates falls quickly with maturity. However, the long run pass-through remains almost complete for maturities lower or equal to one year. Belgian banks seem to adjust more quickly and more fully their retail interest rates on credit to enterprises than those on credit to households. With the exception of consumer loans, the long-term pass-through proves to be above 80 percent. Finally, this article goes into the first results of the new interest rates survey. Banks with a relatively high degree of capital coverage are found to ask higher lending rates and are probably granting riskier loans. Liquid banks and large banks generally set lower lending rates. Belgian firms and households are facing lending conditions broadly similar to those prevailing in the euro area.Pass-through, Banks, Determinants of lending interest rates