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Heterogeneity in Bank Pricing Policies: The Czech Evidence

Author

Listed:
  • Roman Horvath
  • Anca Maria Podpiera
Abstract
In this paper, we estimate the interest rate pass-through from money market to bank interest rates using various heterogeneous panel cointegration techniques to address bank heterogeneity. Based on our micro-level data from the Czech Republic, the results indicate that the nature of interest rate pass-through differs across banks in the short term (rendering estimators that constrain coefficients across groups to be identical inconsistent) and becomes homogeneous across banks only in the long term, supporting the notion of the law of one price. Mortgage rates and firm rates typically adjust to money market changes, but often less than fully in the long run. Large corporate loans have a smaller mark-up than small loans. Consumer rates have a high mark-up and are not found to exhibit a cointegration relationship with money market rates. Next, we examine how bank characteristics determine the nature of interest rate pass-through in a cross-section of Czech banks. We find evidence for relationship lending, as banks with a stable pool of deposits smooth interest rates and require a higher spread as compensation. Large banks are not found to price their products less competitively. Greater credit risk increases vulnerability to money market shocks.

Suggested Citation

  • Roman Horvath & Anca Maria Podpiera, 2009. "Heterogeneity in Bank Pricing Policies: The Czech Evidence," Working Papers 2009/8, Czech National Bank.
  • Handle: RePEc:cnb:wpaper:2009/8
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank pricing policies; financial structure; monetary transmission.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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