Discussion Papers no. 665

How do banks' funding costs affect interest margins?

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We use a dynamic factor model and a detailed panel data set with quarterly accounts data on all Norwegian banks to study the effects of banks' funding costs on their retail rates. Banks' funds are categorized into two groups: customer deposits and long-term wholesale funding (market funding from private and institutional investors including other banks). The cost of market funding is represented in the model by the three-month Norwegian Inter Bank Offered Rate (NIBOR) and the spread of unsecured senior bonds issued by Norwegian banks. Our estimates show clear evidence of incomplete pass-through: a unit increase in NIBOR leads to an approximately 0.8 increase in bank rates. On the other hand, the difference between banks' loan and deposit rates is independent of NIBOR. Our findings are consistent with the view that banks face a downward-sloping demand curve for loans and an upward-sloping supply curve for customer deposits.

Om publikasjonen

Tittel

How do banks' funding costs affect interest margins?

Ansvarlige

Arvid Raknerud, Bjørn Helge Vatne, Ketil Rakkestad

Serie og -nummer

Discussion Papers no. 665

Utgiver

Statistics Norway

Emne

Discussion Papers

ISSN

1892-753X

Antall sider

44

Målform

Engelsk

Om Discussion Papers

Discussion papers comprise research papers intended for international journals and books. A preprint of a Discussion Paper may be longer and more elaborate than a standard journal article as it may include intermediate calculations, background material etc.

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