CFCM contributes to BIS research into bank lending rates

CFCM Director Paul Mizen has been engaged in a Bank for International Settlements project into the rate setting behaviour of banks in Europe. This addresses a puzzle that has emerged in the monetary transmission mechanism since the financial crisis. The global finance crisis prompted central banks in many countries to cut short-term policy rates to near zero levels. Yet, lending rates did not fall as much as the decline in policy rates would have suggested. The BIS working paper argues that comparison of lending rates with policy rates is misleading: banks do not obtain all their funds at policy rates, and after the crisis, costs of funding rose substantially. Comparing lending rates with a weighted average cost of funds is more appropriate and it shows that banks did not substantially change their rate setting behaviour after the financial crisis; the interest rate pass-through relationships across eleven countries in Europe appears to have remained stable.

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