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Large banks, loan rate markup and monetary policy

Author

Listed:
  • Vincenzo Cuciniello

    (Bank of Italy)

  • Federico M. Signoretti

    (Bank of Italy)

Abstract
This paper studies the implications of introducing large monopolistic banks, which can affect macroeconomic outcomes and thus the response of monetary policy to inflation, in a model with a collateral constraint linking the borrowers� credit capacity to the value of their durable assets. First, we find that strategic interaction generates a countercyclical loan spread, which amplifies the impact of monetary and technology shocks on the real economy. This type of financial accelerator adds up to the one due to financial frictions and is crucially related to the existence of non-atomistic banks. Second, the level of the spread and the degree of amplification are positively related to the level of entrepreneurs� leverage, reflecting the fact that higher leverage implies greater elasticity of the policy rate to changes in loan rates, which in turn increases banks� market power. Third, we find that amplification is stronger the more aggressive the central bank�s response to inflation, as measured by the inflation coefficient in the Taylor rule.

Suggested Citation

  • Vincenzo Cuciniello & Federico M. Signoretti, 2014. "Large banks, loan rate markup and monetary policy," Temi di discussione (Economic working papers) 987, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_987_14
    as

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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Monacelli, Tommas & Jamilov, Rustam, 2020. "Bewley Banks," CEPR Discussion Papers 15428, C.E.P.R. Discussion Papers.
    2. Alessandro Borin & Michele Mancini, 2016. "Foreign direct investment and firm performance: an empirical analysis of Italian firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 152(4), pages 705-732, November.
    3. Benchimol, Jonathan & Bozou, Caroline, 2024. "Desirable banking competition and stability," Journal of Financial Stability, Elsevier, vol. 73(C).
    4. Giovanni Melina & Stefania Villa, 2018. "Leaning Against Windy Bank Lending," Economic Inquiry, Western Economic Association International, vol. 56(1), pages 460-482, January.
    5. Aysun, Uluc, 2016. "Bank size and macroeconomic shock transmission: Does the credit channel operate through large or small banks?," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 117-139.
    6. Antonio Acconcia & Elisa Scarinzi, 2022. "The effects of local demand and supply restrictions on markup," Temi di discussione (Economic working papers) 1370, Bank of Italy, Economic Research and International Relations Area.
    7. Chrysanthopoulou, Xakousti, 2021. "Banks’ internalization effect and equilibrium," MPRA Paper 109275, University Library of Munich, Germany.
    8. Dávila, Eduardo & Walther, Ansgar, 2020. "Does size matter? Bailouts with large and small banks," Journal of Financial Economics, Elsevier, vol. 136(1), pages 1-22.
    9. Borys Grochulski & Daniel Schwam & Yuzhe Zhang, 2018. "Cyclical Properties of Bank Margins: Small versus Large Banks," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 1-33.
    10. Cao, Jin & Chollete, Lorán, 2017. "Monetary policy and financial stability in the long run: A simple game-theoretic approach," Journal of Financial Stability, Elsevier, vol. 28(C), pages 125-142.
    11. Chrysanthopoulou Xakousti & Mylonidis Nikolaos & Sidiropoulos Moise, 2024. "Regulatory capital requirements, inflation targeting, and equilibrium determinacy," Working Papers of BETA 2024-05, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    12. Jiaqi Li, 2021. "Imperfect Banking Competition and Macroeconomic Volatility: A DSGE Framework," Staff Working Papers 21-12, Bank of Canada.

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    More about this item

    Keywords

    large banks; bank markup; monetary policy;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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