Hampered Interest Rate Pass-Through: A Supply Side Story?

Abstract

This paper shows that the supply side of credit is a major factor for the phenomenon of hampered interest rate pass-through in monopolistic banking markets. Our data, covering all 1,555 small and medium sized banks in Germany, provides a clear way to partial out demand shocks; we are thus able to show that while market-power banks charge higher loan rates, they spare their borrowers a part of exogenous upward shifts in the yield curve and furthermore withhold a substantial part of rising market rates from their depositors. Because high market-power banks in our sample are relatively more profitable, they seem to be able to insure their relationship-customers against adverse shocks.