Financial Structure and the Interest Rate Channel

8/8/2019 Financial Structure and the Interest Rate Channel

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WORKING PAPER NO. 40

FINANCIAL STRUCTURE ANDTHE INTEREST RATE CHANNEL

OF ECB MONETARY POLICY

BY BENOT MOJON

November 2000

E U R O P E A N C E N T R A L B A N K

WORKING PAPER SERIES


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3/47

E U R O P E A N C E N T R A L B A N K

WORKING PAPER SERIES

WORKING PAPER NO. 40

FINANCIAL STRUCTURE ANDTHE INTEREST RATE CHANNEL

OF ECB MONETARY POLICY*

BY BENOT MOJON

November 2000

* I should like to thank J. Gual for kindly making his indices of deregulation and competition in European countries available to me, as well as Frank Smets, Ignazio Angeloni, Reint Gropp,Vitor Gaspar, Jrme Henry, Daniela Schackis, Nicole de Windt, Casper de Vries, Jacob de Haan and an anonymous referee for their comments on previous drafts of this paper, Andres

Manzanares for helpful research assistance and Zo Sobke and her colleagues for editing the English. I accept full responsibility for any remaining errors which this paper may contain.


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European Central Bank, 2000

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Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.

The views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank.

ISSN 1561-0810


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ECB Working Paper No 40l November 2000 3

Conten ts

Abstract: 5

1 Introduction 7

2 Thepass-throughfrommoneymarketinterestratestoretailbankinterestrates 82.1 Stylisedfacts 8

2.2 Measurementofthepass-through 92.3 Analysingandtestingthedeterminantsofthepass-through 112.3.1 Apanelofeuroarearetailmarkets 112.3.2 Determinantsofthepass-through 122.3.3 Resultsoftheestimations 142.3.4 TheimpactofEMUonthedeterminants

ofthepass-through 16

3 Incomeandwealtheffectsofmonetarypolicy 163.1 Assetsandliabilitiesoffirmsandhouseholds 173.2 Recentevidenceonthereferencematurityand

theeffectiveinterestrate 183.3 Doesthesinglemonetarypolicyhaveasymmetr icincomeeffects? 193.4 Doesthesinglemonetarypolicyhaveasymmetricwealtheffects? 20

Conclusion 22

References 24

Appendix:Summarypresentationofthepanelestimat ion 27

Tables 28

Annex:Variablesusedintheregressionofthepanelpass-through 36Tables 36Figures 39

EuropeanCentralBankWorkingPaperSeries 43


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ECB Working Paper No 40l November 20004


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Abstract:

This paper analyses differences in financial structure across euro area countr ies and their

implicationsfortheinterestratechannelofthemonetarytransmissionmechanism.Itfocuseson

thosedifferencesinfinancialstructureacrosscountr ies,whichremaininspiteofthestartofStage

ThreeofEMU.First,thepaperexaminesthepass-throughofmoneymarketratestovariousbank

retailratesandmeasureshowthishasevolvedoverthepasttwointerestratecycles.Ananalysisof

paneldatasuggeststhatcurrentcountr yasymmetr ies intheresponseofbankratestomonetary

policyshoulddecreaseovertimebyvirtueoft heimplementationofthesinglemonetarypolicy,

moneymarketintegrationandthegrowthofdebtsecuritiesmarkets.Thepaperalsoshowsthat

competit ion among banks reduces the interest rate cycle asymmetr y of the pass-through.

Second,recentdevelopmentsinthebalancesheetstructureofhouseholdsandfirmsareexamined.

Thepapershowsthat,at thestartofStageThreeofEMU,theincomeeffectsofmonetarypolicy

arefairlyhomogenousinthefourlargestcountriesoftheeuroarea,although,giventhelargeshareofbondsinthefinancialassetsheldbyItalianhouseholds,wealtheffectsshouldbestrongerinItaly.

JEL codes:E43,E52,G21

Keywords:transmissionmechanism,EMU,financialstructure


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1 Int roduct ion

Oneimportant factor whichmayinfluencethemonetaryt ransmissionmechanism(MTM)isthefinancialstr uctureof theeconomy.BuildingontheBISreportsof1994and1995,anumber of

economists have emphasised that cross-countr y differences in financial str ucturemay lead to

asymmetr iceffectsof thesinglemonetarypolicyinthecountr iesformingtheeuroarea,t hereby

complicatingitsimplementation.1However,asarguedbyArnoldanddeVries(1999),theregime

shift to EMU may itself tr igger convergence in financial structure, thereby reducing the

heterogeneityandrelatedasymmetries.Atthesametime, itshouldbenotedthattheempirical

literatureonthetransmissionofthesinglemonetarypolicyhasnotconvincinglyestablishedthat

significantdifferencesinthemonetarytransmissionmechanismexist.2Anyattempttoexaminethis

empiricallyhas toacknowledgethat there isa lackof consensusonhowto identifymonetary

policyshocksand,moregenerally,onhowtomeasuretheirimpactontheeconomy(Kielerand

Saarenheimo,1998).Moreover,thesestudiesdonotusuallytakeintoaccountthefactthatEMUimpliesthatsomekeylinksinthetransmissionmechanism,suchasthemoneymarketortheyield

curve,arenowcommontoalltheparticipatingcountries.

Insteadofcomparingtheoverallimpactofmonetarypolicyshocksonoutputandprices,thispaper

followsanalternativeapproach,limit ingitsscopetotwoelementsof themonetarytransmission

mechanism(MTM): thepass-throughofpolicy rates to retail bankratesandthebalancesheet

structureofthenon-financialprivatesector.Thisisfortworeasons.First,thesetwoelementshave

a direct bearing on thesubstitution, wealth and income effects which together constitute the

interestratechannelofmonetarypolicy.Second,theharmonisationofthesetwoelementsofthe

MTM is likely to occur only gradually. National segmentation in the European retail banking

industrymayremainsignificantregardlessofEMU,becauseretailbankinginvolvesheavyinvestment

inbrandnames,inanetworkofbranchesandinrelationshipswithcustomers(Gual,1999),aswell

as countr y-specific legal expertise (Cecchett i, 1999).Asa consequence, thepass-through from

policy-controlled interest rates to retail bank interest rates and the effect of those rates on

spending decisions may remain country specific. This potential source of asymmetr y across

countriesisparticularlyrelevantintheeuroareawherebankratesareakeydeterminantofthe

cost of capital and the yield on savings (Prati andShinasi, 1997; McCauley andWhite, 1997).

Similarly,differencesinthesizeandstructureofhouseholdsandfirmsbalancesheets(Kneeshaw,

1995)orintheaveragematurityofinterestratecontracts(Borio,1995),willonlygraduallyadjust

to thenew policyregime. Bydefinition, assetsare accumulatedover time, while interest rate

contractsdependonnationallegalconstraints,consumerhabitsandsocialnorms.Suchdifferences

will,therefore,continuetoaffecttherelativestrengthofsubstitution,incomeandwealtheffectson

spending.

FollowingtheworkbyBorioandFritz(1995)andCottarelliandKourelis(1995),Section2ofthe

paperanalysesthepass-throughofmoneymarketratestobankretailrates.Theanalysisaddsto

thesestudies inthree respects.First, thepass-throughismeasuredforseveralbankcredit and

depositratesforeachofthesixlargestcountriesintheeuroarea(Belgium,France,Germany,Italy,

theNetherlandsandSpain).Usinganerrorcorrectionmodel,Icomputetheresponseafterthree

monthsof25creditratesand17depositbankratestochangesinthemoneymarketrate.Second,

theresponsesareestimatedforeachofthepasttwointerestratecycles,from1979to1988and

from1988to1998,andalsoseparatelyforthesub-periodsinwhichratesincreasedordecreased.

Dividingthepast20yearsintofoursub-periodsmakesitpossibletoanalysetheevolutionofthe

pass-throughoveraneraofmajorchangesinfinancialstructure.Third,byexaminingdifferencesin

pass-throughovertimeandacrosscountriesandmarketstogether,Iamabletoextendthecross

1 See, for example, Barran et al. (1997), Dornbusch et al (1998), de Bondt (1998, 1999).2 See also Kieler and Saarenheimo (1998) or Guiso et al. (1999) for recent surveys.


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sectionanalysisofCottarelliandKourelis(1995)andestimateamodeloftheimpactoffinancial

structureonthepass-through.ThemainresultisthatderegulationofEuropeanbankingmarkets

hashadasignificantimpactonthepass-throughtobothcreditanddepositratesoverthepasttwo

decades.Inparticular,itisshownthatcompetitionhasforcedbankstopassondecreasesinthe

moneymarket rateto credit rates and increases inthemoneymarket to deposit rates more

quickly.Moreover,EMUislikelytospeedupthepass-through,if,asitseemslikely,thevolatilityof

the money market rate is lower than that which was observed on average in the individual

countries.Finally,bankratesarelikelytoreacttomarketratesmorecloselyowingtoincreased

competit ion between bank instruments and debt securit ies, the development of which is

stimulatedbythemonetaryintegrationofeuroareafinancialmarkets.

Section3examinesrecentdevelopmentsinthebalancesheetstructureofbothhouseholdsand

firms and in thematurity structure of interest rate contracts.This analysis updates thecross-

countrycomparisonofthekindconductedinBIS(1995)forFrance,Germany,ItalyandSpain.Itenablesmetocomparethemagnitudeoftheincomeandwealtheffectsofachangeinthemoney

marketratein thosecountries.Itappearsthat thenominalconvergencehasdeliveredportfolio

andinterestratecontractadjustmentswhichtendtoreducecountr yasymmetr iesintermsofthe

incomeeffectsofmonetarypolicy.However,greaterwealtheffectsof interest rateshocksmay

continue to characterise theresponseof Italianhouseholds,becausethebondportfolio of the

latter is significantly larger than is the case in Germany, France or Spain. Finally, Section 4

summarisesthemainconclusionsoftheanalysis.

2 The pass-through from m oney market interest rates to retailbank interest rates

Thissectionanalyses thepass-throughfrom theovernight moneymarket rate (MMR),which is

closelycorrelatedwithpolicy-controlledinterest rates,t ovariousbankcreditanddepositrates.

Section2.1discussessomestylisedfacts.Section2.2goesontodescribehowthepass-throughis

measured.Finally,inSection2.3.thedeterminantsofthepass-throughareanalysedusingapanel

dataapproach.

2.1 Styli sed facts

Figures1aand1bplotretailbankinterestratesagainstthemoneymarketrate.Inallcountries,theMMR,depositratesandcreditratesfollowtwocyclesofapproximatelytenyears.Thefirstspans

theperiodfrom1979to1988andthesecondtheperiodfrom1988to1998.Tables1aand1b

show,forthetotalperiodandforeachofthetwocycles,thecross-correlationbetweenretailbank

interestratesandtheMMRinsixeuroareacountr ies,togetherwithaggregatesfor theeuroarea.

Table1afocusesondeposit rates,whileTable1bprovidessimilarstatisticsforbankcreditrates.

Thereisnoevidenceofasystematictrendinthecorrelationsbetweenretailbankratesandthe

MMRovert ime.WhileinBelgium,FranceandSpainthecorrelationhasincreased,inGermanyand

Italyithasdecreased.Thesecontrastingtrendscanbeobservedforalmostallcategor iesofcredit

anddepositrates.Furthermore,duringthelastinterestratecycle,considerabledifferencesinthe

correlationsofbankrateswiththeMMRacrosscountr ieswerestillpresent.Forinstance,thefirst

differencecorrelation for timedeposits is twiceas large inGermany as inSpainor Italy.Thissuggeststhatthepass-throughmaystilldiffertoasignificantextentamongeuroareacountries.


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2.2 Measurement of the pass-through

Anumberofrecentempiricalstudieshavefocusedonthedeterminantsofinterestratesettingby

banks.3Thesestudies useverydifferent methodologies, ranging from panel data either on the

averagerateforeachbankoronindividualcredittransactions,tomoreaggregateddata.Hence,it

isdifficulttocomparetheresults.4

Bycontrast,BorioandFritz(1995)andCottarelliandKourelis(1994)(hereafterBFandCK)

havecomparedtheimpactofMMRsonshort-termretailbankinterestratesacrosscountr ies.For

theeuroareacountriesintheirsamples,theyfindthatthelong-termelasticitiesarequitesimilar

andingeneralslightlyhigherthanone,exceptinFinlandandFrance.Mostoftheadjustmenttakes

placewithinsixmonths.

Theestimatesofpass-throughpresentedinthissectionareverymuchinthespirit ofBFandCK.Thispaperextendstheiranalysis intwoways.First, itcoverstheretailbankmarketsofthesix

largestcountr ies in theeuroarea(Belgium,Germany,Spain,France, ItalyandtheNetherlands),

while CK and BF concentratedonshort -term credit to firms.Theseretail bank rates are all

publishedbythecentralbanksofthesixcountriesmentionedabove.Mostoftherates,specifically

25creditratesand17depositrates,refertonewbusinesses(Table2a).Second,theresponsesare

estimatedforeachofthetwolastinterestratecycles,from1979to1988andfrom1988to1998,

andseparatelyforthesub-periodsinwhichratesincreasedordecreased.Theratesriseuntil1981

or1982,dependingonthecountry,andsubsequentlyfalluntil1988.Inthecourseofthesecond

cycle,theratesriseuntil1992or1993(1990inBelgium),beforedecliningmoreorlesssmoothly.

Inthisway, it ispossibleto testwhether thereareasymmetries intheestimatedpass-through

dependingonwhethertheMMRist rendingupordown(HerrmannandJahnke,1994).

Toobtainestimatesofthepass-throughof theMMRtovariouscreditanddepositrates,atwo-

stageapproachisused.First,for eachoftheretailbankrates,thefollowingerrorcorrectionmodel

equationisestimated:

whererandistand,respectively,fortheretailbankrateandtheMMR,and isthefirstdifference

operator.

Thenumberoflagsischosenaccordingtoageneral-to-specificapproach,withtheinitialmaximumnumberoflagssetatsixformonthlyratesandattwointhecaseofFrance,forwhichtheonly

quarterlyretailratesareavailable.Thisspecificationallowsfor thecaseinwhichbothratesareco-

integrated.Inthatcase,thecoefficient,whichdrivestheretailbankratebacktoitsequilibrium

value,willbesignificant.Intheeventthattheratesarenotco-integrated,theerrorcorrectionterm

iseliminatedandthespecificationofthefirstdifferencepreventsanyriskofaspuriousregression.

Inall cases,regression inlevelsleadstoapproximatelythesamehierarchyamongtheestimated

( )11max

0

max

1

=

=

+++= ttk

k

ktk

j

j

jtjt irircr

3 For euro area countries, see in particular Cruz Manzano and Galmes (1996) for Spain, Baumel and Sevestre (1997) and Rosenwald

(1998) for France, Swank (1995) and Fase (1995) for the Netherlands, Angeloni et al. (1995) for Italy.4 Cruz Manzano and Galmes (1996) use a weighted average of credit rates and a weighted average of deposit rates for each Spanish

bank, based on banks quarterly reports to the Banco de Espaa. Baumel and Sevestre (1997) compute individual bank interest rates as

the ratio of interest income to credit taken from profit and loss and balance sheet accounts. They use yearly accounts for a sample ofaround 50 banks. Rosenwald (1998) uses a sample of individual credit transactions gathered from a sample of 600 bank brancheswhich report their interest rate pricing to the Banque de France every quarter. Swank (1995) and Fase (1995) estimate time seriesstructural models of credit and deposit supply and demand functions on the basis of national aggregate interest rates. Angeloni et al.(1995) also adopt a time series approach. They examine the interest rate response to monetary policy shocks of small banks comparedwith large banks and of small borrowers compared with large borrowers.


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pass-throughs.Inasecondstage,theestimatesareusedtocomputethedynamicresponseofthe

retailbankratetoapermanentincreaseofonepercent intheleveloftheMMR.Asuptofour

sub-periodsand42retailbankratesareincluded,Ionlyreporttheresponseafterthreemonths,

whichprovidesagoodsummaryoftherangeofdisparit iesacrosscountriesandmarkets.

Table2agivestheestimatedpass-throughforeachretailinterestrate,whileTable2bsummarises

the results by providing average credit and deposit rates by country. Several features are

noteworthy.First,retailbankratesrespondsluggishlytochangesintheMMR.Inmostcases,the

responseafterthreemonthsislessthanone.Short-termcreditratesgenerallyrespondfasterto

theMMRthanmor tgagesorinvestmentcreditratesanddeposit rates.Onaverage,thefullsample

estimationsshowthatthethree-monthelasticityoftheshort-termcreditratetoMMRshocksis

equalto0.73.Bycontrast,theresponseofratesassociatedwithmortgagecreditis,onaverage,

equalto0.31andthatofdeposit ratesis,onaverage,0.27.

Thestickinessof retail bankrates isacommonempirical findingwhichhasbeengivenseveral

justificationsintheliterature(Nabar,ParkandSaunders,1993).First,raisingbankcreditratesmay

leadtoadeteriorationintheaveragecreditworthinessofborrowers.Second,evensmallmenu

costs, incurredwhenadjusting retail rates, couldlead to pricerigidities (Mester andSaunders,

1995).Third, banks could be providing their customers with implicit interest rate insurance,

especiallyiftheyareinvestinginlong-termrelationships.Finally,itmayalsobethecasethatthe

responseofbankinterestr atesislessthanonebecausetheyhavealongermaturitythantheMMR.

Thedifferencesbetweentypesofbankrates(i.e.thefactthatpass-throughtomor tgagecredit and

depositcontractsissmallerthanthattoshort-termcreditcontracts)tendtosupportthisview.In

thiscontext,uncertaintyaboutthefutureevolutionofmarketrateswouldpreventbanksandtheir

customersfromimmediatelyadjustingtochangesintheMMR.

Asecondfindingisthat,especiallyinthemostrecentinterestratecycle,thepass-throughtocredit

ratesishigherinthefirstphaseofthecycle,whentheMMRincreases,thaninthesecondphase,

thatofdecreasinginterestrates.Theoppositeistruefor thedepositrates.This interestratecycle

asymmetr yoft hepass-throughisobservedfor mostratesinItaly,Germany,SpainandFrance,as

well as forDutchdeposit rates.This finding isalso rather typicalof theempirical literatureon

interest rate setting by banks. For instance, Mester andSaunders (1995) show that theprime

interestrateofcommercialUSbanksexhibitsmoredownwardstickinessthanupwardstickiness.

This asymmetr ic pass-through may reflect the maximisation of banks income when their

customers are confronted with the costs of switching banks, which reduce the interest rate

elasticityofthecredit demandcurveandthedeposit supplycurve.NeuwarkandSharpe(1992)

showthatthisasymmetr yislesspronouncedwhencompetit ionamongbanksisfierce.

Third,thefindingsofCKandBF,whoobtainedheterogeneityinthepass-throughacrosscountries,

arelargelyconfirmedwithintheeuroarea.Thiscaneasilybeobservedforthefullsampleinthe

first columnofTable 2b.Thedispersion of countries around the averagepass-throughslightly

decreasesfromthe1979-88cycletothe1988-98cycle.ForBelgiumandSpainanincreaseinthe

pass-throughtendstobeobservedfromthefirstcycletothesecond,whileforGermanyandItaly

themoveisintheoppositedirection.Inspiteofthisevolution,theresponsesofretailbankrates

tochangesintheMMRremainheterogeneousacrossthecountr iesoftheeuroarea.Theissueof

thedeterminantsofthisheterogeneity,whichisobviouslyofgreatimpor tance,isaddressedinthe

nextsection.


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2.3 Analysing and testing the det erminants of the pass-through

2.3.1 A panel of euro area retail markets

Havingmeasuredthepass-through,Igoontoanalysewhichobservablefeaturesoftheinstitutional

andfinancialstructurearelikelytoexplainthesedifferencesacrosscountr iesintheeuroareaand

overtime.

CK made a similar attempt to link the stickiness of retail bank interest rates to observable

measures of institutional and financial structure. They tested the impact of banking market

structureonacross-sectionofpass-throughelasticitiesestimatedfor31countries.Theirresults

confirm that a number of indicator s of financial structure canexplaindifferences in thepass-

through.FivefeaturesarefoundtosignificantlylowertheresponseofbankratestotheMMR:the

absenceofamoneymarketfornegotiableshort-terminstruments;relativelyhighvolatilityoftheMMR; restr ictions on international capital flows; theexistenceofbarr iers to entr y; and public

ownershipof thebanking system. However, neither the existence of a market for commercial

papernordegreesofmarketconcentrationsignificantlyaffectthepass-through.

Myapproachistousethemeasureofpass-throughestimatedintheprevioussectiontobuilda

panelofretailbankmarkets.Oneimportantadvantageofpanelregressionoverthecross-section

estimationimplementedbyCKisthatitcantakeintoaccounttheheterogeneityofbankretail

marketsbothacrosscountr iesandovertime.Thelatterdimensionisofparticularinterestfor the

countr iesconsideredgiventhatallofthemunderwentstructuralreformsoftheirfinancialservices

industriesduringtheperiodunderconsideration.

Each individualmarket (i.e.25creditmarketsand17depositsmarkets) is representedbyan

estimate of the three-month pass-through over four sub-periods (as shown in the last four

columnsofTable2a).Owingtolimitedavailabilityofsomeoftheinterestratestatistics,thereare

142pass-throughmeasuresaltogether;87forcreditratesand55fordeposit rates.

Lookingseparatelyatthosesub-periodsinwhichinterestratesincreasedandthoseinwhichthey

decreased makes it possible to test the impact of competition on the interest rate cycle

asymmetr y of the pass-through. In the following, indicators of competit ion are multiplied by

dummyvariablesindicatingtheupwardordownwardphaseoftheinterestratecycle.Inthisway,it

ispossibletotestwhethercompetitionhasapositive(negative) impactonthepass-throughto

creditrateswheninterestratesfall(rise),andanegative(positive)impactonthepass-throughto

deposit rates when interest rates rise (fall).5 Furthermore, the explanatory variables areconstructedasannualaveragesovertheperiods1979-82,1982-88,1988-92and1992-98.6Thislow

frequencyofvariationisnecessaryinviewofthefactthatfinancialstructuresevolveatarelatively

slowpace.

5 Moving from imperfect competition to perfect competition should mean that the pass-through increases overall. However, if imperfect

competition persists the impact of competition should be asymmetric in the sense that, for instance, banks with declining market powerwill be slower to cut interest rates on credit in response to decreasing market interest rates, but faster to increase them in response torising market interest rates.

6 Owing to limited data availability, the indicators of the rigidity of bank costs (1979-96) are based on the annual average and are

computed over the periods 1979-82, 1982-88, 1988-92 and 1992-96, and indicators of competition in banking are based on theannual average and are computed over the periods 1981-82, 1982-88, 1988-92 and 1992-95.


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2.3.2 Determinants of the pass-through

Theanalysis focusesonfour setsofdeterminantsof thepass-through: (1)themonetarypolicy

regime;(2)competitionamongbanks;(3)competitionfromdirect finance;and(4)ther igidityof

bankcosts.7

Thefirstsetoffactorslikelytoinfluencethepass-throughrelatetothe monetary policy regime.The

most str iking result in theprevious section is thestickiness of retailbankinterest rates.This

obviouslyresultsfromthedifferenceinmaturitybetweencreditanddepositcontractsandthe

MMR.Forinstance,Ifindinthisstudythatbankrateswithalongermaturityrespondlessrapidlyto

changesintheMMRthanbankrateswithashortermaturity.However,itisalsolikelythatthe

degreeofstickinessisinfluencedbythemonetarypolicyregime.First,nominalpricesareusually

adjustedmorefrequentlywheninflationishigh.Itwouldbeinterestingtotestwhetherthisisalso

thecaseforretailbankinterestrates,i.e.whetherthepass-throughishigherwheninflationishigh.Second,themonetarypolicyregimemayaffectthevolatilityoftheMMR.Forexample,ifthecentral

banktargetstheexchangerateandlackscredibility,itmayhavetoadjusttheovernightinterest

ratefrequently.Theretailbankinterestratewillnot necessarilyadjusttoeverychangeintheMMR,

especiallyifthiswouldimplyadjustmentcosts.Moregenerally,changesintheMMRaremorelikely

toaffectretailinterestratesiftheyareperceivedtobepermanentthaniftheyareperceivedtobe

temporary.

As thesix countries inthesamplehaveexperiencedverydifferent levelsof inflationandMMR

volatility,I investigatewhethertheseaspectsof themonetarypolicyregimecanexplainsomeof

thevarianceinthepass-through.Inthepanelregressions,theinflationrateissimplytheannual

averageforeachsub-period,whilethevolatilityoftheMMRisitsstandarddeviationforeachsub-period.

Thesecondandthirdsetoffactorsaffectingthepass-throughare,respectively,competitionfrom

directfinanceandthelevelofcompetitionamongbanks.8AsfoundbyNeumarkandSharpe(1992),

competit ioncanbeexpectedtoreducetheinterestratecycleasymmetr yofthepass-through.

Competition between banks and financial markets areof relevance to thetwo majoractivitiesof

banks. On the liabilities side of banks balancesheets, the growth of mutual funds is putt ing

pressureontheyieldsofferedonbankdeposits.Ontheassetsside,thecompetitionfromdirect

financeshouldonlyposeathreatasfaraslargefirmsareconcerned.Inordertotesttheimpactof

directfinanceonbankpricing,theratioofcommercialpaperandoftotalshort-termsecuritiesto

GDPareintroducedinthepanelregression.9Thisshouldhaveanegativeimpactonbankinterestratemargins.Followingthesamelineofthought,short-termsecuritiesconstituteanalternativeto

tr aditionalbankdeposits.Schmidt etal. (1997)argue that depositsare theonlyinstr ument for

whichEuropeanbanksareunderpressurefrommarketinstruments.Theydescribethisprocessas

alengtheningofthechainofintermediaries:non-bankscollectsavings,whichtheyinvestinbonds

andcertificatesofdepositissuedbybanks.Hence,banksobtainmoreoftheirfundingthroughthe

marketsandlessthroughthetraditionalcollectionofdeposits.Eventhoughmostmoneymarket

funds are either controlled or distr ibuted by banks, for which they constitute a source of

commissionincome(ECB,1999),theirrapidexpansionhasobviouslyaffecteddeposit collection.

7 See also Borio and Fritz (1995) and Enfrun and Cordier (1994) for similar discussions.8 For a general discussion on the ongoing restructuring of the European financial industry, see Gual (1999), Davis and DeBandt (1999)

and the Centre for Economic Policy Research (1999).9 Although only large firms can issue commercial paper, the experience of the United Kingdom, France and Belgium, where direct finance

has been promoted, shows that even small firms now have access to variable rate credit indexed to the money market.


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Itisverydifficulttofindgoodindicatorsofthecompetitive intensity among banks.Inthecontextof

theeuroarea,competit ionisusuallyconsideredtohavebeengrowingsteadilyfor thepasttwo

decades.The Europeanbanking sector of today inherited excess capacity from a once highly-

regulated banking industr y with litt le competit ion.10The intensification of competit ion, which

startedinthe1980swithderegulation,hasledtoarestructuringoftheEuropeanbankingindustry,

ascanbeseenfrom thedecreasingtrendinthenumberof institutionsineveryMemberState

(ECB,1999;DavisandDeBandt,1999;Gual,1999).Inthefollowing,Iuseanindexofderegulation

measurestakenbyEuropeancountriesbetween1980and1995,constructedbyGual(1999),asan

indicatorofthecompetitiveintensityamongbanks.11Thisindicatorhastwomajoradvantagesover

traditionalindicatorsofcompetition,suchascapacityindicatorsorconcentrationindicators.First,

it iswidelyaccepted that competit ion in the Europeanbanking sector hasbeenstimulatedby

deregulation. Second, deregulation policies are wholly exogenous. However, the causal links

betweenconcentrationorcapacityandcompetitionareambiguous.Inthecaseoftheeuroarea,

thefallfromthepeaknumberofinstitutionsobservedin1980tothenumberofinstitutionslistedin1995variesfrom8%inBelgiumto44%inFinland.It was35%inGermany,43%inFranceand15%

inItaly.Yetit isnotclearwhethercompetitionincreasedordecreasedasthenumberofplayersin

themarketdeclined.

FollowingGual (1999),both the levelandthecumulative levelof the indicatorareused in the

regressions (Table A1).The cumulative indicator may account for, in particular, the fact that

deregulationmeasuresshouldhavealastingeffectoncompetition.

Thefourthsetoffactorslikelytodeterminethemagnitudeofthepass-throughisrelatedtothe

rigidity of the costsofbanks(EnfrunandCordier,1994).Ifbankssettheirinterestratesbyaddinga

marginovertheircosts,onecanexpectthepass-throughtoreflecttheimpactofchangesintheMMRonthetotalcostsof thebank.The latter canbebrokendown intooperatingcostsand

fundingcosts.Operatingcostsrelatetothemaintenanceofabranchnetworkandtostaffcosts.A

priori,ahighershareofoperatingcostsintotalcostsshouldimplyasmallerpass-through.Inthe

regression,theratioofstaffcoststogrossincomeisusedasanindicatorofoperatingcosts.12

Therigidityoffundingcostsdependsmainlyonpricingpracticesinthebankingsectorandonthe

extent to which the interest rate receivedor paidby banks is itself rigid.13 For instance, the

estimatesintheprevioussectionshowthatratespaidbybanksont raditionaldepositsrespond

moresluggishlythanmarketrates.Abankwhichcanrelyontraditionaldepositsismorelikelyto

havemorer igidfundingcoststhanabankwhichfundsitselfmostlybyissuingdebtonthecapital

markets.The share of deposits from non-banks in the liabilities of banks is then used as an

explanatoryvariableofthepass-throughtocreditrates.Thisvariableisexpectedtohaveanegativecoefficient.

10 See Mac Cauley and White and the references given therein.11 Here I quote Guals own description of his index of competi tion in footnote 26 of Gual (1999): For the econometric analysis we have

considered nine deregulation indicators, each of them including different deregulation measures or directives. Before the adoption of thederegulation measure, the indicator takes a value of zero, and it takes a value of one in the period in which the measure is adopted. [ ]The nine indicators are: (1) interest rate deregulation; (2) freedom of establishment; (3) implementation of the first banking directive; (4)

the implementation of the second banking directive; (5) the liberalisation of capital flows; (6) the adoption of the directive on branchestablishment and head offices outside the EU; (7) t he adoption of directives on consolidated surveillance;(8) t he adoption of depositinsurance and money laundering directives, and; (9) the adoption of the directive on prudential regulation.

12 The impact of staff costs on the pass-through may also be interpreted as indicating imperfect competition in the banking sector.However, this link is not trivial, as inertia in the costs of banks can be consistent with fiercer competition. In their analysis of the recent

evolution of the US banking industry, Berger et al. (1999) highlight the development of new services as the driving force behind theincrease in costs in US banking, in spite of its restructuring. If this pattern is also relevant for the euro area, the lack of downsizing in

terms of numbers of bank employees and branches could be explained by the fact that European banks have mainly been competing byextending their branch networks and expanding their staff to provide more services to their customers.13 Regulation of interest rate setting may increase the rigidity of bank funding costs. French deposit rates, for instance, are administered. It

is also often the case that some credit rates are subsidised in order to support a particular sector of the economy. Two recent examplesare the subsidised loans which were par t of the package to help the convergence of East Germany and the zero interest rate loansintroduced in France in 1993 to stimulate activity in the real estate sector.


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Finally,greaterefficiencyinthebankspricingmayimplysmallercross-subsidisationbetweenbank

products,asreflectedinhighersharesofnon-interestincomeingrossincome.Asthecompetition

onthemarket foreachbankingproductincreases,banksaredriventopriceeachproductat its

marginalcost.Banksthendevelopfeeincomefromotherservicesandsetdeposit andcredit rates

closertomarketrates.Theshareofnon-interestincomeingrossincomeisthereforeexpectedto

haveaposit iveimpactonthepass-through.Finally,proxiesforcredit demandanddepositsupply

arealsoincludedintheregressions.Therearetwokindsofproxies:theaveragerealgrowthrateof

creditanddepositvolumesfor eachretailmarketandarealvariable,whichshouldbecorrelated

withcreditdemandordepositsupply.Inthecaseofcreditmarkets,thisisdependingonthe

credit market either the average real growth rate of GDP or residential or non-residential

investment.Inthecaseofdepositmarkets,itisthegrossnationalsavingratioandrealGDPgrowth.

Asummarypresentationoftheestimatedequationisgivenintheappendix.

2.3.3 Results of the estimations

Anumber ofpreliminaryregressions were performed with theresult that models with country

dummies,dummiesforthematurityofthecreditordepositcontracts,dummiesfordepositrates,or

dummiesforhouseholdorcorporatecreditmarketswereallrejectedinfavourofaspecificationwith

individualfixedeffects(withinestimator).Itisneverthelessinterestingtonotethatregressionson

countrydummiesandoncreditmarketcategorydummiesshowthatBelgium,FranceandSpainhave

asignificantlylowerinterceptthanGermany,ItalyandtheNetherlands.Similarly,thepass-throughto

deposit rates is significantly smaller inSpain than in the other countries. Lastly, the responseof

interestratesoncorporatecreditissignificantlyhigherthanthepanelaverage,whiletheresponseof

interestratesonmortgagesissignificantlylowerthanthepanelaverage.

Theestimationstrategywastoregressthethree-monthelasticit iesovereachofthefourgroupsof

explanatoryvariables andthen to estimate a general equationwith thosevariables from each

groupwhichappearedtobesignificantinthegroupregressions.Everyequationincludescreditor

depositvolumeandrealvariablesinordertocontrolfor theeffectsofcreditdemandordeposit

supplyonthepass-through.

Theresultsforcreditmarkets(seeTable3a)suggest that thedegreeof pass-throughis indeed

related to financial str ucture.A number of theexplanator y variables are significant. First, the

volume of credit and real demand both tend to lower thepass-through to credit rates when

interestratesarefalling,whiletheirimpactisnotsignificantwheninterestratesarerising.Thisis

partiallyconsistentwiththeabilityofbankstopreservetheirinterestratemarginoncreditwhenthey face stronger credit demand.Therefore, the two variables are kept inall the regressions.

Second, thetwoindicatorsof themonetarypolicyregimeMMRvolatilit yandinflation are

significant.Asexpected,MMRvolatilityhasanegativecoefficient while inflationhasasignificant

positivecoefficient.Third,competitionamongbanks,asmeasuredbytheGualcumulativeindexof

bankderegulation,appears toputpressureonbanks toadjust interest ratesonbankcredit in

responsetoadecreaseintheMMR.Theresultsalsosuggestthatgreatercompetitionreducesthe

abilityofbankstoincreaseinterestratesonloansinperiodswhentheMMRincreases,butthisis

not significant.Altogether, itseemsthatcompetit ion inthebankingsector tends to reducethe

interestratecycleasymmetryofthepass-through.Fourth,thecoefficientsfortheindicatorsof

directfinancearepositiveinbothphasesoftheinterestratecycle,butarenotsignificant(see

regressions4,5and6).Thefactthatitispositiveisnotconsistentwiththeideathatcompetitionfrom thecommercial paper market putspressureonbanks margins, but it lends itself to the

interpretationthatbanksfollowmarketinterestratesmorecloselywhendirectfinanceismore

widelyavailable.


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Finally,theindicatorsoftherigidityofbankfundingcostsareallsignificant.Asexpected,thehigher

the staff costs, the smaller the impact of monetary policy shocks on bank credit rates.This

influenceoffixedcostsontheimpactofvariablecostsonpricesmaybeseenasconfirmingthat

thebanking sector was ina regime of imperfect competit ionduring theperiodunder review.

However,it issurprisingtofindthatthehighertheratioofnon-interest incometogrossincome,

themoreslowlybanks reducetheircredit rateswhenthemonetarypolicy ratedecreases.My

sampleprovidesnoevidencethathighernon-interestincomeinducesbankstosettheirinterest

ratesclosertomoneymarketr ate.Inthesamevein,thefactthatchangesintheMMRarepassed

throughtocreditr atesfasterwhennon-bankdepositsaresmaller(afundingresourceatrelatively

rigidprices)issomewhatsurprising.

Theresultsfor thepass-throughtodeposit rates(seeTable3b)alsosuggestanimportantrolefor

financialstructure.

Regression1showsthatthevolumeofdepositscannoteasilybeinterpretedasaproxyfordeposit

supply.This isprobablyowing to the lackof reliabledataonthedepositvolumeswhichwould

correspond exactly with the different interest rates used to compute the pass-through.The

impactsof thesavingratioandofGDPonthepass-throughareeasier tointerpretastheymay

indicate, respectively, a larger and smaller supply of deposits for precautionary motives. For

instance,whenrates increasehigher saving ratiosseemto allow banks toadjustdeposit rates

fasterthanwhentheratesdecrease,whilehigherGDPgrowthhastheoppositeeffect.Deposit

volumeswereexcludedfromtheotherregressionsbecauseofthedifficultyininterpretingthesign

oftheirimpact.

Competition has a significant impact on thepass-through to deposit rates. First, competit ionamong banks, as measured either by the Gual index or by the cumulative Gual index (see

regressions3and7),inducesbankstoincreaseinterestratesonbankdepositsfasterinperiods

whentheMMRincreases.Along thelinesof theargumentationdevelopedabove, it seems that

competitionamongbanksreducestheinterestratecycleasymmetryofthepass-through.Second,

thesizeofthemarketforshort-termdebtsecuritiesincreasestheresponsivenessofthebank

depositratetotheMMR(seeregressions5,7and8).Thisfindingtendstoconfirmtheconclusion

of Schmidt et al. (1998) that, inEurope, funding costs of banks increasinglydependonmarket

conditions.Otherindicatorsoffinancialstructuredonothaveasignificantimpactonthepass-

throughtodepositrates.Moreover,onlyMMRvolatilityhasthesignthatwasexpected.

Tosumup,althoughthispanelexercisehassomelimitations,suchasthesizeofthesampleorthe

lackofdetaileddataonthestructureofthecreditordepositmarketineachcountry,itshowsthatthestickinessofbankinterestratesvariesaccordingtoanumberofobservablefeaturesof the

nationalretailbankingindustries.First,MMRvolatilityhasanegativeimpactontheresponseof

credit rates.Second, inflationhasapositive impactontheresponseof bankcredit rates.Third,

competition,whetherfromdirectfinanceoramongbanks,alsohasanimpact.Thevolumeofshor t-

termsecurit ieshasapositive impact onthepass-through.Thecompetitive intensitywithinthe

banking industryseems to reducetheabilityofbanks todelaycredit ratedecreaseswhenthe

marketratedeclinesanddeposit rateincreaseswhenthemarketraterises.Finally,theindicators

oftherigidityofbankfundingcostsseemtomatteronlyfort hesett ingofcreditrates,inthesense

thathigherstaffcostsresultinasmallerdegreeofpass-through.


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2.3.4 The impact of EMU on the determinants of the pass-through

Lookingtothefuture,itisinterestingtonotethatEMUwillaffectsomeofthedeterminantsofthe

pass-through.First,thecompletedefacto integrationofthemoneymarketmeansasinglelevelof

MMRvolatilitythroughout theeuroarea.Thisshouldhastentheconvergenceofthepass-through

acrosstheeuroarea.Second,thecurrentdevelopmentofshort-termsecuritiestendstoconfirm

that,asmanyobserversexpected,EMUwillfurtherenhancedisintermediation.14ThefirstyearofEMU

hasproducedstrikingresults.Altogether,internationalcorporatebondissuancedenominatedineuro

amountedtoEUR21.7billioninthefirstquarterof1999,comparedwithEUR3.4billioninthefirst

quarterof1998(seethe29April1999issueoftheFinancialTimes).Moreover,theshareoftop-

ratedfirms(tripleanddoubleA)intheseissuesdecreasedfrom66%ofthetotalin1998to46%in

1999,15whichshowsthattheissuanceofdebtsecurit iesisnotrestrictedtothelargestfirms.

Third,EMUisexpectedtoreinforcecompetitionintheEuropeanfinancialmarkets.Nonethelesstheintegrationoftheretailbankingmarketsattheeuroarealevelwillonlytakeplacegradually,

hencethecompetitivepressuresfacedbybanksmayremainheterogeneousforsometime.Cross-

border mergerswithin theeuro area remaina marginal phenomenon and thevarious factors

leadingtoinertiainlocalbankingmarketsshouldnotbeunderestimated.Bankingisabusinessin

whichprice isnot theonlymeansofproduct differentiation.Long-term investments inbranch

networ ks,personalisedservicesandbrandnamesconstitutebarr ierstoentrywhichwillnotbe

removedbyharmonisedregulationalone(Gual,1999).Moreover,inacontextofover-capacity,the

incentiveforforeignbankstopenetratedomesticmarketsisalsolimitedbytheneedtoinvestin

gaininganunderstandingof locallaw andaccountingprocedures,aswell asbytheprospectof

adverseselectionamongthosecustomersrejectedbylocalbanks.

3 Income and wealth effects of monetary policy

Thissectionexaminesthebalancesheetstructureofnon-financialagentsandhowitaffectsthe

sensitivitybothofinterestincomeandpaymentsandofwealthtochangesinthemoneymarket

interest rate.KneeshawandothercontributorstotheBISreport(1995)underlinethatthisisa

potentialsourceofasymmetriesinthetransmissionmechanism.Balancesheetstructuresinfluence

theabilityofeconomicagentstochangetheirintertemporalallocationofresourcesfollowinga

changeintheinterestrate.

First, these str uctures shape the interest income and payment flows.There are three majordeterminantsoftheincomeeffectsofachangeinmonetarypolicy:thesizeandcompositionofthe

financialbalancesheet, thereferencematurityfor depositandcreditcontractsandthefinancial

assetpriceresponsestomonetarypolicyshocks.16Forinstance,householdsthathaveverylittle

debtbutholdalltheirwealthinmoneymarketsecuritiesarelikelytoseetheirdisposableincome

risefollowingatighteningofmonetarypolicy.Bycontrast,leveragedfirmsthatissuemainlyshor t-

14 For example, investment bankers expected the market for corporate bonds to expand in Europe to approach US standards (Brookes and

Winkelmann, 1998; ECB, 1999). One reason is that the enhanced substitutability of government debt has removed opportunities forhigh-yield/high-risk investment. Corporate debt can fill the vacuum. Moreover, institutional investors have increasing amounts ofretirement savings to invest which, combined with increased competition in the underwriting business, will lower the costs of commercialpaper and corporate bond issuance. Finally, the integrated euro-denominated financial market favours credit risk diversification acrosscorporate sector issuers of debt securities. The fact that institutional investors are looking for new high-risk,/ high-yield securities also

implies that smaller companies will have greater access to direct finance than they have to date. McCauley and White (1997) recall that

it took only 16 years for US junk bonds and commercial paper debt to reach a level of USD 200 billion, i.e. around a quarter of banklending to corporations. Yet there might be some legal constraints on their development in Europe (Cecchetti 1999, Laporta et al. 1997,1998). See also the January 2000 issue of the ECB Monthly Bulletin.

15 See also the January 2000 issue of the ECB Monthly Bulletin.16 I do not take non-financial wealth into account. See Maclennan et al. (1998) and references therein for a survey on asymmetries in the

MTM owing to differences in the institutional features of housing markets in European countries.


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termdebtwouldexperienceafallintheirprofits.Intheory,theformerwillraisetheirconsumption

andthelatterwilldecreasetheirinvestmentonlyiftheyaresubjecttoaliquidityconstraintoriftheir

permanentincomeisaffected.However,asfeweconomistsdisputethefactthatatleastsomeagents

are liquidity constrained in their expenditure decisions, it seems interesting to compare across

countriestheinterestflowsthatfollowchangesintheinterestrate.InthefollowingIexplorerecent

evidencewithregardtobalancesheetsandinterestratecontractpractices,afterwhichIsummarise

thisinformationbycompilingweightedassetandliabilityindicatorssoastoreflecttheexposureof

firmsandhouseholdstoincomeeffectsofmonetarypolicy.

Turningtowealtheffects,balancesheetstructuresobviouslyplayarolebyscalingthechangesin

assetpricesthataretriggeredbyinterestratechanges.Again,thechangeinassetpriceismost

likelytoaffectexpenditureif itisperceivedtobepermanent.Thiswouldoccurwhenpricesare

misaligned and the monetary policy shock is the catalyst that drives them back to their

fundamental value. Agents may then adjust their savings to restore their desired wealth. Incomparingthewealtheffectsacrosscountries,Ishallnotdiscusstheresponseoffinancialasset

pricestomonetarypolicybecause,astheyieldcurveconvergenceshows,theycanbeexpectedto

besimilaracrosstheeuroarea.Instead,Isimplycomparethevolumeoffinancialwealthforwhich

thepriceissensitivetochangesintheinterestrate.

3.1 Assets and liabilities of firm s and households

ThefinancialaccountsofGerman,Spanish,FrenchandIt alianfirmsandhouseholdsfor1996,1997

and1998aresummarisedinTable4.17TheassetcategoriesappearinginTable4arethesumofthe

assetshelddirectlyorindirectlythroughmutualfunds.

Firms

Theincreaseinthetotalsizeofthebalancesheetoffirmshasmostlybeendrivenbythelevelofthe

stockmarket.Similarly,theproportionsofsharesinliabilitiesandinassetsreflecttheincreaseinstock

marketpricesobservedoverrecentyearsinthefourcountries. 18Bankfinancestilllargelydominates

firmsexternaldebtfinance,exceptinFrancewheredebtsecuritiesandtradecreditaremuchmore

widespreadthatintheotherthreecountries.19In1998,overallbankcreditrangedfrom39%ofGDPin

Spainto57%inGermany.Onthefinancialassetsside,depositsaremuchlargerinGermanyandSpain

thaninFranceandItaly.InFrance,thisisoffsetbyalargerpor tfolioofmoneymarketpaper.Thefinancial

assetsofItalianfirmsremainsubstantiallysmallerthanthoseoffirmsintheothercountr ies.

Households

Ontheliabilit iessideofhouseholdsbalancesheet,thesmallscaleofItaliansindebtednessist he

mostnoticeablefeature.Itshouldbenoted,however,thattheirdebttoGDPratioalmostdoubled

between1996and1998.Thisisprobablytheresultofthesharpdecreaseofinterestrates,which

cameaboutinthenominalconvergenceprocessforStageThreeofEMU.Indeed,inSpainasharp

increaseindebtisalsoobserved.

17 Longer evolutions for these indicators are available in Mojon (1998) for France, Germany and Italy, and in Gonzales Minguez (1997) for

Germany and Spain.18 In the case of France, unlisted shares were excluded from the balance sheet reported in Table 4. They amount to more than 80% of the

shares issued by the corporate sector, and to more than 95% of the shares appearing on the assets side. As a consequence, the valuationof unlisted shares at listed share prices led to the values of French shares rocketing, which did not reflect the true market capitalisation.

19 In Germany, private sector bonds are in fact more significant than in France, but around 90% of these bonds are issued by the financial

sector. Private bonds are also issued almost exclusively by financial institutions in Italy, while they are evenly distributed across thefinancial and the non-financial private sector in Spain and the non-financial private sector represents one-third of total private bonds inFrance.


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Thecomposit ionofhouseholdassetsseemstodependmainlyonthekindofproductavailablein

eachcountry.Forinstance,theItalianhouseholdsectorholdsalotmoredebtsecuritiesandfar

fewertimeandsavingsdepositsthanthesamesectorintheothercountries.

3.2 Recent evidence on the reference maturit y and the effective interest rate

Thissectionbrieflyoutlinesthedeterminantsoftheeffectiveinterestratewhichappliestothedebt

liabilitiesorassetsofahouseholdorafirm.Interestratestatisticsprovidesomeevidenceonnew

businesscontracts.20However,it isdifficulttot racethelinkbetweeninterestratesonnewloansor

depositsandeffectiverates,becauseprecisedataonthematurityofinterestratecontractsarevery

scarce.Thecompositionoftheassetssideandliabilit iessidearediscussedinturn.

Onthefinancialassetsside,t imedeposits,bondsandshort-termsecurities,essentiallyheldthroughmoneymutualfunds,arethemainsourcesofinterestincome.Thesluggishnessofmostbankdeposit

rates issuchthat thekeyparameterof theresponseof interest income to themonetarypolicy

instrumentislikelytobethesizeoftheshort-termsecuritiesportfolio.Table4showsthatthishas

beenfairlysmallintherecentyears.AsaproportionoftheassetsofItalianhouseholds,short-term

securitiesaredecreasingsubstantially,probablybecauseoftherecentdecreaseinshort-termrates.

Onthefinancialliabilitiesside,theresponseofinterestpaymentstochangesintheMMRisslightly

morecomplicated.Asfarasshort-termcreditisconcerned,theresponseshouldberapidbecause

credithastoberenewedfrequently.Asfarastheeffectiveinterestpaymentsonmediumtolong-

termcreditsareconcerned, thespeedof tr ansmissionshoulddependontheshareof variable

interestratecontracts,thefrequencyoftheinterestratevariationsdefinedinthecontractandthecorrelationoftheMMRwith thereferenceinterest rateusedin thecontract(Borio,1995and

European MortgageFederation, 1998).Thesepatterns of interest rate contractsadjust to the

credibilityof themonetarypolicyregime.For instance,insomecountriesoftheeuroareafixed

interestratecontractsarelikelytodevelopbecausetheyarelessriskyinthecontextofEMUthan

theywereinthecontextofvolatileinflationandinterestrateswhichprevailedinthesecountr ies

prior to thestart ofStageThree.However, thepatterns of interest ratecontracts inusealso

dependonnational regulations toprotectconsumers.Suchregulationscouldconstituterather

persistentlegalobstaclestotheharmonisingimpactofEMUoninterestratecontractpractices.

Ishallnowdescribehowlong-termcreditcontractsevolvedduringtherun-uptoEMU.Borio(1995)

providesafirstpointofcomparisonconcerningthematuritystructureofdebtinthesevenlargest

Europeancountries(seeTable5a).In1993,theshareofoutstandingdebtbearinginterestrateswhichwereeitherpredominantlyfixedorindexedtolong-terminterestratesamountedtomorethan55%,

exceptinItaly.Thematurityoffirmsdebtwaslowerthanthatofhouseholds.Inthecaseofmortgage

debt,Borio (1995)usesthetypologyoftheEMF,whichdividesvariableratesintothreecategories:

renewable,renegotiableandreferencecontracts.21Theavailableevidencefor1993showsthatfixed

long-termcontractswererelativelyinsignificantinItaly,SpainandtheUnitedKingdom.Morerecent

evidence,collectedbytheEMF(1998)throughitsnetworkofnationalmembers,showsadramatic

changeinItaly(seeTable5b).Theshareofmortgagesatfixedlong-terminterestratesincreasedfrom

20 For instance, the previous section has shown that, in the euro area, short-term credit rates usually react faster than long-term credit rates;deposit rates are more sluggish than credit rates; and the elasticity of time deposit and of saving deposit rates increases with maturity.

21 Renegotiable contracts set in advance dates on which the two parties have to agree upon a new level of interest rate. Referencecontracts set a reference interest rate, usually a MMR or an interest rate on bonds, which the mortgage rate has to follow at discrete

intervals. It should be kept in mind that, even when using these categories, the comparability of interest rate contracts across countriesis limited. In Belgium, Germany, the Netherlands and Spain, household debt is dominated by long-term rates, although mortgage rates arenot fully fixed. For instance, some reference contracts can involve indexation to a MMR (France) adjusted every month, or to a one-year

rate (Spain), or indexation to a bond rate which can be adjusted after ten years (Belgium). In some cases the interest rate variationcannot exceed a cap which is set at the beginning of the contract. In addition, information on the distribution of each kind of creditcontract is very limited.


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25%in1993to50%in1997.The1997statisticsalsoshowthatthepropor tionofvariablerateswith

areferenceratewithamaturityoflessthanoneyearisspreadingincountriessuchasFranceandthe

Netherlands,whichareusuallyassociatedwithlonger-termcontracts.BelgianandGermanmarkets

continuetobedominatedbylong-termfixedinterestratecontractsandbycontractsunderwhich

theinterestrateisupdatedonlyinfrequently.However,itshouldbestressedthatinGermanythe

referencematurityformortgagecontractsisdecreasing.

Altogether, thematurity str ucture ofmortgagedebt in thelargest countr ies of theeuro area

appearstobeconvergingtosomeextent.

3.3 Does the single monetary policy have asymm etr ic income effects?

Having takenstockof theevidence on retail rates, balancesheet structureandthe referencematurity, Inowturn to thetaskofevaluating theriskofasymmetric incomeeffects inFrance,

Germany, ItalyandSpain.Eventhoughthescarcityof thedata rulesout a rigorousaccounting

approach,suchananalysisshouldbringout whether therisksof important asymmetries inthe

incomeeffectsexistintheseearlystagesofEMU.

Theapproachtakenstartswiththefinancialbalancesheetoffirmsandhouseholdsandweightseachbalance

sheetiteminproportiontothelikelyresponseoftheassociatedinterestratetochangesintheMMR.Those

itemswhichprovideaninterestrateincometotheholderaredepositsandshort-termsecurit ies,eitherheld

directlyorthroughmoneymarketfundsandbonds.Similarly,issuersofshort-termsecurities,bonds,short-

termandlong-termcreditaresubjecttointerestpayments.TheSizecolumnsinTable6setouttheseitems

for1998(1997forFrance)asapercentageofGDP.Howevereachitemshouldnotbeweightedequallyinthe

evaluationoftheincomeeffectsofmonetarypolicy.Forinstance,theinterestincomefrommoneymarket

fundsharescloselyfollowschangesintheMMR.Theincomeflowsassociatedwithotherassets,suchas

depositsandbonds,tendstorespondmoresluggishly.Ontheliabilitiesside,proportionoflong-termcredit

thatisgrantedatvariableinterestratesiscomputed.Forfirms,thisisdoneonthebasisofBorio(seeTable5a)

becausethisisthelatestavailabledataonthematuritystructureoftheirmediumtolong-termborrowing.For

mortgagecredits,thisproportionistheunweightedaverageofthefiguregivenbyBorio(seeTable5a)and

morerecentfiguresobtainedfromtheEMF(seeTable5b).Thisapproximationisintendedtocapturethefact

thattheamountoutstandingofmortgagecreditresultsfromaccumulatednewissuanceoverthelast15to20

years.Finally, the interestpaymentswhich wouldarisefrom new long-termcredit andthe issuanceor

acquisitionofnewbondsaredisregarded.

Theweightingofeachbalancesheetitemisasfollows.Ontheassetsside,GermansightdepositsandallFrenchdepositsaregivenaweightofzeroeitherbecausetheypaynointerestorbecausethe

governmentadjuststheirratesfor politicalreasons,whileshort-termsecurit iesaregivenaweightof

1andbondsaweight of0.10.Inaddition,twoassumptionsaremadeconcerningtheresponseof

interestratepaymentsonbankdeposits.Accordingtothefirstassumption(seecolumnI inTable6)

the three month pass-through estimated for the period 1988-98 is used as a weight for the

correspondingdeposit.Accordingtothesecondassumption,AssumptionII,theweightisthepass-

throughestimatedfor thelast upward phaseof theinterest ratecycle, from1988 to 1992.This

secondassumptiontakesaccountofboththeinterestratecycleasymmetr yofthepass-throughand

thefactthatinterestratesappearedtoreachathroughin1999(seeFigures1aand1b).

Thesameprocedureisusedforshort-termcreditwhichappearsontheliabilitiesside.It isassumed

thatshort-termcreditisrenewedrapidlyenoughfortheweightstobederiveddirectlyfromthe

estimatedpass-throughtotheinterestratesonnewbusiness.ForGerman,FrenchandItalianfirms,

aswellasforItalianhouseholds,novariableratesonlong-termcredit areavailable.Theweightof

long-termcreditatvariableratesisarbitrarilysettoeitheralowboundof0.25(forAssumptionI)or


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toanupperboundof0.75(forAssumptionII).InTable6,thefiguresthatappearintherowslabelled

Weightedassets,WeightedliabilitiesandNetweightedassetsareweightedsumsofthefigures

appearingintheSizecolumn,usinginturnthetwoassumptionsfortheweights.

TheoverallimpressiongivenbytheapproximationpresentedinTable6isthattheincomeeffectsof

monetarypolicyarequitehomogeneous.Thereareexceptions,though,suchasthelargevolumeof

short-termsecuritiesheldbyFrenchfirmsorthesmallvolumeofSpanishdebtatshort-terminterest

rates.Yetthemagnitudeofthedifferencesdoesnotseemtobesuchthatstrongasymmetriesinthe

incomeeffectsofthesinglemonetarypolicycouldariseacrossthefourlargestcountriesintheeuro

area. It shouldbestressed that therecent adjustment inItalianhouseholdport folios, i.e.thesharp

increaseintheirindebtednessandthesharpdecreaseintheirholdingsofshort-termsecurities,has

reducedthegapusuallyobservedvis--vistheotherthreecountriesintermsofnetincomeeffects.

Thisevaluationoftheincomeeffectsofmonetarypolicyshouldbeseenasqualitativeratherthanstrictlyquantitative.Incomeeffectsaremoredifficult toobserveforatleasttworeasons.First,non-financialagents

adjust their portfolios following a monetary policy shock. Second, owing to the lack of data, only

approximateeffectiveinterestratescanbecalculated.Nevertheless,itappearsthat,atthestartofStage

ThreeofEMU,therearenorisksofstrongasymmetriesintheincomeeffectsofthesinglemonetarypolicy

acrossFrance,Germany,ItalyandSpain.

3.4 Does the single monet ar y policy have asymm etr ic wealth effects?

The wealth effects of monetary policy obviously depend on the volume of assets held by

householdsandfirmsandonhowmuchtheirvaluerespondstochangesintheMMR.Bondand

sharepricesrespondalmost instantaneouslytoachangeintheshort-termrate. Inthecaseofhouseholds,thesefinancialassetscanbeheldeitherdirectlyorthroughpensionfunds.Inthecase

offirms,thebondportfolio isnegligibleandnetholdingsofsharesarenegative.Inprinciple,the

wealth effect does not apply to the liabilities side of firms balance sheets.22 Therefore, I

concentrateonthehouseholdsector anddonotcommentonthepotentialwealtheffectonthe

sharesheldbyfirms.FirsttheissueofassetpriceresponsestochangesintheMMRisaddressed.

Thisisfollowedbyacomparisonofthesizeofportfoliosofbondsandstocksheldbyhouseholds

inthefourlargestcountriesintheeuroarea.

Theresponseofthevalueofabondportfoliotohorizontalshiftsintheyieldcurvedependsonthe

maturityoftheportfolio.Thelongertheaveragematurityofaportfolio,thegreaterit scapitalgains

willbefollowingadownwardshiftintheyieldcurve.Theaveragematurityofbondsintheeuro

areaisdifficulttocomputeprecisely.Itisprobablysomewherebetweenfiveandtenyears.Asafirstapproximation,thevariationinthevalueofabondsportfoliocanbetakenastheresponseofthe

valueofabondwiththeaveragematurityoftheportfolio.Forinstance,iftheaveragematurityof

theportfolioofbondsheldbyhouseholdsissevenyears,thedecreaseinthevalueofthepor tfolio

followinga100basispoint upwardshift in theyieldcurveisaround6%.Thiseffect shouldbe

consideredasanupperboundtothepotentialimpactofachangeintheMMRonthevalueof

bonds,becausemonetarypolicyshocksalsoaffecttheshapeoftheyieldcurve.23,24

22 Nevertheless, a decrease in the market value of the shares of a firm may have an adverse impact. For instance, it may reduce the firmswillingness or ability to issue new debt or new shares. The theory of the balance sheet channel of monetary policy stresses theimportance of the fall in the net asset value of borrowers (Bernanke and Gertler, 1995). This may lead to a decrease in credit supply

proportional to the fall in the value of borrowers collateral. The empirical evidence of the credit channel in the euro area is surveyed inMojon (1999).

23 See Buttiglione et al. (1998) for measures of the yield curve response to monetary policy shocks in euro area countries.24 Nonetheless, in some circumstances, a monetary policy shock can trigger a bond crash. This happened, for instance, in the United States

in 1994, when long-term rates suddenly overshot the increase in the federal funds rate. In such circumstances, the drop in the value ofthe bond portfolio will reflect the overshoot of the long-term rate over the MMR.


23/47


Thepriceofstocksisalsohighlysensitivetointerestrates.Thesharepriceisusuallydefinedasthe

presentvalueofthefuturestreamofdividends.Thediscountrateusedinthecomputationofthe

presentvalueis,again,thelong-terminterestrate.Thelowertheleveloflong-terminterestrates,

thehighertheimpactofachangeinthelong-termrateontheunderlyingvalueofstocks.Atthe

currentleveloflong-termratesinEurope(the10-yeargovernmentbondratecurrentlystandsat

around6%),anincreaseof100basispointsinthelong-termrealratetranslatesintoadecreasein

theunderlyingstockvalueofaround15%.Inaddition,higherinterestrateslowertheprofitsof

indebtedfirmsandcould,ift heinterestrateshockwereexpectedtoimpactongrowth,negatively

affecttheprospectoffuturecashflows.However,itcannotbetakenforgrantedthatthestock

pricewilldecreaseinlinewithitsfondamentalvalue.Iftheinterestrateshocktriggersachangein

marketexpectationsregardingthesustainabilityofstockprices,thelattercanfallevenmore.In

particular,ifmarketsbecomeconvincedthattheyhavebeentoooptimisticandthatitistimefor

thebubbletoburst,anadversemonetarypolicyshockcanbethecatalystfor thisburst.Tosum

up, theimpactofmonetarypolicyonthestockmarket canbestrongeither inperiodsof lowinterestratesorinperiodswhenthepricesofstocksdeviatefromtheirfundamentalvalues.

Agivendecreaseinbondpricesandstockpricesislikelytohavegreaterwealtheffectsincountries

wherehouseholdsholdmorebondsormoreshares.Asiswidelyknown, Italianhouseholdsown

morebondsthanhouseholdsintheothercountries.Thisisaconsequenceofthesizeofthedebtof

theItalianpublicsector.

Evaluatingtheportfolioofmarketablesharesismoredifficult because,exceptinFrance,financial

accountsdonot distinguishbetween listedandunlistedshares.This isanimportant distinction

becauseonlytheformeraresubjecttolossesinvaluefollowingincreasesinthelevelofinterest

rates.AccordingtoOECD estimatesofquotedshareshelddirectlybyhouseholds, in1998thetotalwealthofhouseholdsintheformofsharesamountedtoaround25%ofGDPinFranceand

inGermanyandtoaround40%of GDP in Italy. Basedon theSpanishstockexchange(Bolsa)

figures,thevalueofquotedsharesheldbySpanishhouseholdsreachedapproximately34%ofGDP

bytheendof1998.Infact,thesemagnitudesareverysmall comparedwithaUSstockmarket

capitalisationof113%ofGDPat theendof1998.Moreover,thepropensitytoconsumeoutof

wealth is much smaller than the propensity to consume out of income. Boone, Giorno and

Richardson (1998)25 estimate theelasticity of consumption to thereal equityprice in theG7

countries.Unsurprisingly,itismuchsmallerincontinentalEuropethanintheUnitedStates.Itis

equal to0.018 inGermany,0.014inFranceand0.008in Italy,where it isnot significant. Inthe

UnitedStatesitreaches0.064.

Altogether,thetotalportfolioheldbyhouseholdswhichcanexperienceafallinvalueamountstoaround80%ofGDPinItaly,55%inGermany,50%inSpainand36%inFrance(seethelastlineof

Table 4).Yet the likelihood that national asymmetr ies in financial wealth effects will lead to

significantasymmetricresponsesofconsumptionseemsfairlylimited.

25 See also Kennedy, Palerm, Pigott and Terribile (1997).


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Conclusion

Thispaperhasfocusedontwoaspectsoffinancialstructureintheeuroarea,whichmaycontribute

tonationalasymmetriesintheinterestratechannelofthesinglemonetarypolicy.Thefirstisthe

heterogeneityof retailbankingmarkets.Thesecondis thebalancesheetstructureof firmsand

households. These two determinants of the interest rate channel of monetary policy are

particularlyinterestingtomonitor becausetheymaybeslowtoadaptt othenewmonetarypolicy

regime. While the move to EMU has created a single money market and the resulting

disappearance of exchange rate risk has homogenised the yield on debt securit ies at every

maturity,retailbankingremainsmainlynational,ifnot local,andopportunitiesforcross-countr y

arbitragecontinuetobelimited.Similarly,balancesheetswillonlygraduallyadjustashouseholds

andfirmsexploitnewinvestmentandsavingopportunitiesinthesinglecurrencyarea.

Theheterogeneityofnationalbankretailmarketsintheeuroareaisreflectedinthepass-throughoftheMMRtobankscreditanddeposit rates.Asasummaryindicator oft hispass-throughIuse

theresponseaftert hreemonthsofthebankretailratetoa100basispointpermanentincreasein

theMMR.Ifindthatduringthelasttenyears,whichcoveracompleteinterestratecycle,thepass-

throughhas been different both across countr ies andacross markets. Short-term credit rates

typicallyrespondfasterthanmortgagesordepositrates.However,withineachsegmentnational

asymmetriesremainsubstantial.Forinstance,duringthelastinterestratecycle,theaverageimpact

oftheMMRonshort-termcreditratesrangedform0.50inItalyto0.96inBelgiumand0.99inthe

Netherlands.

Apanelof25creditmarketsand17depositmarketsoverfoursub-periodsisthenconstructedin

order to identifythedeterminantsof theresponseof bankretail rates to theMMR.Themainresultsofthisanalysiscanbesummarisedasfollows.First,forbothcreditanddepositrates,the

higher the volatility of the MMR the lower the pass-through. The latter implies that the

establishment of a singlemonetarypolicy is likely to contribute toamorehomogenous pass-

throughtobankratesacrosscountr ies.Inaddition,totheextentthatmoneymarketvolatilityin

theeuroareaisconsiderablylessthanitwasinmosteuroareacountriesinthepast,itwillalso

increasetheaveragepass-through.For example,volatilityintheMMRhasfallensharplyincountries

suchasSpain,wherethepass-throughhastypicallybeensmallerthantheaverage.Second,higher

competitionfromothersourcesoffinanceoralternativeformsofinvestment increasethepass-

throughfromtheMMRtobankrates.Totheextent thatsuchcompetitionislikelytoincreasein

thenearfuture,partlyasaconsequenceofEMU,thisagainimpliesthelikelihoodofafasteraverage

pass-throughintheeuroareathanbefore.Third,usingadmittedlyimperfectindicatorsofbanking

competition,suchastheindicatorofnationalandEuropeanderegulationpolicies,Ifindevidenceinfavour of thehypothesis that thedegree of competit ionamong banks reduces their ability to

smooth their interest rate margin across the interest ratecycle, i.e. competit ion reduces the

interestratecycleasymmetryofthepass-through.Finally,withtheexceptionofstaffcosts,Idonot

findanylinkbetweenindicatorsoftherigidityofbankfundingcostsandthepass-through.These

resultsshowunambiguouslythat,intheeuroarea,retailbankingmarketstructureshavehadan

impactonthepass-through.Theresultsalsopoint totheneedtomonitor retailbankingmarket

structureintheeuroareaclosely,inordertoevaluatehowthepass-throughmightevolve.

Thesecondpartofthepaperprovidesacomparisonofthebalancesheetsofthecorporateand

householdsectorsinGermany,Spain,FranceandItalyatthestart ofStageThreeofEMU.These

balancesheets will be important factors indetermining the income and wealth effects of thechanges in interest rates tr iggeredbymonetarypolicy. I show that partlybecauseof recent

adjustmentsinthereferencematurityofcreditcontractsandinthecompositionofbalancesheets,

especiallyinItalythereshouldnotbestrongnationalasymmetriesintheincomeeffectsofthe


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singlemonetarypolicy.Onthecontrary,the financialwealtheffectsonhouseholdscouldbetwice

asgreatinItalyasintheotherthreecountr ies.However,theimpactofmonetarypolicyshockson

financialwealthishighlyuncertainandthepropensitytospendfinancialwealthseemstoberather

smallintheeuroarea.


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Appendix: Summar y presentat ion of the panel est im at ion

Theestimatedequationscanbesummarisedasfollows:

rt/i

t-3=V x up + V x dn +Y xp + Y x dn

+ vol (i) + p

+Gual index x up + Gual index x dn

+cp x up + cp dn +st-sec x up + st-sec x dn ++staff-cost +dep-share + nii

wherert/i

t-3isthethree-monthelasticityofthebankretailrate r

ttotheMMRi

tasderivedfrom

estimatesforeachsub-period.Up(dn)aretimedummieswhichtake,respectively,thevalueone

(zero) for 1979-82 and 1988-92 and zero (one) for 1982-88 and 1992-98.The explanator y

variablesare:

V:growthinthevolumeofcreditordeposits;

Y:eithergrowthinGDP,investmentor residentialinvestment inthecaseofcreditmarkets,

orgrowthinGDPandsavingratiointhecaseofdepositmarkets;

vol(i):standarddeviationoft heMMRtimeseries;

p:inflationrate;

Gual index :Gualindexofcompetition;

cp:ratioofcommercialpapertoGDP;

st-sec :ratioofallshortsecuritiestoGDP;

dep-share :shareofnon-bankdepositsintheassetsofbanks;

staff-cost andnni:ratiosofbanksstaffcostsandnon-interestincometobanksgrossincome.

A priori, the parameters to be estimated, ,, , and should be positive in the equationfor the credit rates pass-through; and negative for that of the deposit rates. , ,, andshould be negative in credit rates pass-through and positive for that of deposit rates. andshould be negative, whileand should be positive, in both the credit and the deposit equations.Finally,, which is estimated only for the credit equation, should be negative.

ThevaluestakenfortheexogenousvariablesaregiveninTablesA1,A2andA3.


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Table 1a

Stylised facts on the link between money market rates and bank deposit rates

Table 1b

Stylised facts on the link between money market rates and bank credit rates

Level correlation

Time deposits Savings accounts

1979-98 1979-88 1988-98 1979-98 1979-88 1988-98

Germany 1.00 0.99 1.00 0.78 0.94 0.94Spain 0.76 0.38 0.95 0.79

Italy 0.96 0.96 0.94Netherlands 0.67 0.84 0.90Euro area* 0.99 0.98

First difference correlation

Time deposits Savings accounts

1979-98 1979-88 1988-98 1979-98 1979-88 1988-98

Germany 0.72 0.74 0.67 0.39 0.44 0.13Spain 0.03 -0.02 0.24 0.18Italy 0.46 0.61 0.36Netherlands 0.02 0.01 0.15

Euro area* 0.72 0.47

Sources: Authors computation on the basis of ECB and BIS databases. The bank rates used to compute the table are listed in Table 2. In

cases when several rates are available, the following were chosen: Germany, time deposits on amounts below DEM 1 million and savings

accounts at three months notice; Spain, time deposits and savings deposits; Italy, time deposits (maximum rate); Netherlands, savings

accounts (ordinary).

Level correlation

Short-term credit to firms Investment credit to firms Mortgage credit

1979-98 1979-88 1988-98 1979-98 1979-88 1988-98 1979-98 1979-88 1988-98

Belgium 0.95 0.93 0.98 0.83 0.82 0.85 0.84 0.82 0.85Germany 0.91 0.97 0.88 0.95 0.94 0.96Spain 0.92 0.78 0.98 0.78 0.4 0.98 0.78 0.29 0.97France* 0.92 0.73 0.94 0.94 0.76 0.96 0.95Italy 0.97 0.96 0.94

Netherlands 0.98 0.96 0.99 0.85 0.81 0.92Euro area** 0.98 0.95 0.97

First difference correlation

Short-term credit to firms Investment credit to firms Mortgage credit

1979-98 1979-88 1988-98 1979-98 1979-88 1988-98 1979-98 1979-88 1988-98

Belgium 0.54 0.53 0.61 0.19 0.14 0.38 0.13 0.15 0.15Germany 0.60 0.60 0.61 0.54 0.56 0.49Spain 0.27 0.24 0.55 -0.06 -0.17 0.37 -0.03 -0.09 0.30France* 0.59 0.60 0.59 0.59 0.58 0.64 0.53

Italy 0.67 0.76 0.63Netherlands 0.69 0.69 0.66 0.21 0.23 0.21Euro area** 0.32 0.44 0.35

Sources: Authors computation on the basis of ECB and BIS databases. The bank rates used to compute the table are listed in Table 2. Incases when several rates are available, the following were chosen: Germany, overdraft over DEM 1 million and mortgages at fixed rates;

Spain, credit at floating rate, medium-term credit and mortgage loans; France, short-term and long-term loans to firms and fixed rates

housing loans; Italy, short-term loans to firms (minimum rate); Netherlands, cash advance (minimum)

* France: Rates are quarterly and the sub-periods are 1984-98, 1984-93 and 1988-98..

** Euro area: Starts in 1990.

Tables


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Belgium 1979-98 1979-88 1988-98 1979-81 1982-88 1988-90 1990-98

Cash advance credit (N4) 0.64 0.47 0.96 0.7 0.22 0.15 1.00Investment loans (N5) 0.20 0.22 0.45 0.31 0.06 0.10 0.61Mortgage loans (N2) 0.20 0.25 0.26 0.68 0.06 0.47 0.05

1993-98Time deposits, 3 months, average rate (N8) 0.94Savings deposits, average rate (N9) 0.27

Germany 1979-98 1979-88 1988-98 1979-81 1982-88 1988-92 1992-98

Current account < DEM 1 million 0.63 0.79 0.68 0.57 1.12 0.88 0.39Current account > DEM 1 million (N4) 0.67 0.95 0.68 0.64 1.02 0.85 0.36Discount on commercial bills 0.66 0.89 0.94 1.08 1.17 1.14 1.02Mortgages, variable 0.53 0.5 0.56 0.39 0.75 0.59 0.47Mortgages, fixed (N2) 0.54 0.57 0.45 0.39 0.70 0.44 0.45Time deposits < DEM 1 million (N8-2) 0.90 0.96 0.66 0.85 1.18 0.65 0.76Time deposits > DEM 1 million 1.13 1.43 0.78 1.48 1.44 0.68 0.82Savings deposits, 3 months notice 0.21 0.33 -0.04 0.29 0.51 -0.06 0.03Savings deposits, 12 months notice 0.20 0.32 0.002 0.28 0.42 -0.01 0.09

Spain 1980-98 1980-88 1988-98 1980-83 1983-88 1988-92 1992-98

Credit, average rate (N6) 0.01 0.01 0.21 0.00 0.11 0.32 0.24Bank floating lending rate (almost N4) 0.51 0.56 0.65 0.21 0.49 1.21 0.55Medium-term credit (1-3 years) (N5) 0.00 0.05 0.20 -0.01 0.08 0.71 0.18Mortgages (N2) 0.07 0.06 0.07 -0.01 0.08 0.31 -0.11Bank prime lending rate 0.21 0.14 0.23Savings deposits, average (N10) 0.02 0.02 0.11 0.00 0.03 0.08 0.13

1979-98 1979-88 1988-98 1979-83 1983-88 1988-92 1992-98Time deposit rate (N8) 0.00 -0.01 0.10 0.00 0.03 0.08 0.15

1987-98 1988-92 1992-98Sight deposit rates (N7) 0.14 0.18 0.05Savings deposit rate 0.07 0.16 0.12

France 1984-98 1984-93 1988-98 1984-88 1988-93 1993-98

Firms, short-term, average (almost N4) 0.81 0.75 0.86 0.41 0.76 0.71Firms, med. to long-term, average (N5) 0.84 0.83 0.63 1.37 0.75 0.42

1990-98 1990-95 1993-98Household, permanent overdraft 0.32 0.43 0.23Household, other personal loans (N3) 0.50 0.52 0.46Mortgage, fixed (N2) 0.34 0.34 0.41Mortgage, variable 0.22 0.18 0.28

Italy 1979-98 1979-88 1988-98 1979-82 1982-88 1988-92 1992-98

Prime rate 0.85 1.19 0.80 1.76 0.69 1.32 0.58Minimum credit rate (N4-2) 0.62 0.95 0.50 1.23 0.64 0.65 0.62

1984-98 1984-93 1988-98 1984-88 1988-92 1992-98Normal credit rate (almost N4-1) 0.54 0.55 0.55 0.40 0.87 0.53

1979-98 1979-88 1988-98 1979-82 1982-88 1988-92 1992-98Maximum deposit rate 0.27 0.42 0.18 0.22 0.39 0.21 0.39

1984-98 1984-93 1988-98 1984-88 1988-92 1992-98Normal deposit rate 0.14 0.12 0.10 0.24 0.08 0.63

1989-98 1988-92 1992-98Sight deposit rate (N7) 0.15 0.15 0.26

Netherlands 1979-98 1979-88 1988-98 1979-81 1982-88 1988-92 1992-98

Cash advance, minimum 1.03 0.91 0.99 1.29 1.33 1.00 1.12Cash advance, maximum 1.04 1.08 0.99 1.29 1.33 1.00 1.12Mortgage credit (N2) 0.23 0.3 0.27 0.07 0.38 0.16 0.33Ordinary savings deposits 0.01 0.01 0.04 -0.01 0.07 -0.01 0.06Time savings deposits, 3 months notice 0.07 0.02 0.1 0.05 0.14 0.11 0.11Time savings deposits, 12 months notice 0.09 0.09 0.19 0.05 0.11 0.15 0.26

Time savings deposits, 2 years notice (N8-1) 0.25 0.26 0.41 0.07 0.65 0.19 0.83

Table 2a

Three-month pass-through of the MMR to the bank retail interest rates over the samplesub-periods

Sources: Author's computation on the basis of retail bank rates published by national central banks. The bank rates are available in the BISdatabase, except for French rates, which are taken from the statistical supplement of the Banque de France Monthly Bulletin, and theSpanish mortgage rate and the Italian sight deposit rate, which are taken from the ECB database. Money market rates are overnight ratesfrom the BIS database. The abreviation in parenthesis refers to the rates available in the ECB database of national retail interest rates. Seethe statistics page on www.ecb.int.


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Table 2b

Averages of the three-month pass-through reported in Table 2a

1979-98 1979-88 1988-98 1979-81 1982-88 1988-92 1992-98

All 0.43 0.50 0.45 0.50 0.55 0.49 0.47

Credit 0.53 0.59 0.59 0.62 0.62 0.68 0.53Breakdown by borrower

Short-term credit to firms 0.73 0.83 0.78 0.97 0.80 0.89 0.73Mortgages 0.31 0.34 0.31 0.30 0.39 0.36 0.27

Breakdown by countryBelgium 0.35 0.31 0.56 0.56 0.11 0.24 0.55Germany 0.61 0.74 0.66 0.61 0.95 0.78 0.54Spain 0.15 0.17 0.28 0.05 0.19 0.64 0.22France 0.83 0.79 0.75 0.89 0.50 0.42

Italy 0.67 0.90 0.62 1.50 0.58 0.95 0.58Netherlands 0.77 0.76 0.75 0.88 1.01 0.72 0.86

All deposits 0.27 0.33 0.20 0.30 0.43 0.18 0.35

Breakdown by countryBelgium 0.61Germany 0.61 0.76 0.35 0.73 0.89 0.32 0.43Spain 0.01 0.01 0.11 0.00 0.03 0.13 0.11Italy 0.21 0.27 0.14 0.22 0.32 0.15 0.43

Netherlands 0.11 0.10 0.19 0.04 0.24 0.11 0.32

Sources: Author's computation on the basis of Table 2a. Averages of the estimated pass-through.


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