Dispersion Of Interest Rates Research Articles

Influence Between Bank Spread Rate and NPA

This research aimed to determine how interest rate dispersion affects the quantity of bad loans at Indian financial institutions. The research strategy used in this analysis of Indian Bank data was descriptive in nature. The Bank Supervision Report was employed as a secondary source for this study’s data collection. The correlation between interest rate spread and loan default was investigated using quantitative and qualitative methods of data analysis. Charts, tables, and pie diagrams were used to illustrate the information. The research found that the cost of loans paid to borrowers is affected by interest rate spread, and that interest rate regulations have far-reaching implications on asset non-performance since they determine the interest rate spread in banks and assist alleviate moral hazards incidental to NPAs. As interest rates are benchmarked against the associated non-performing assets and non-performing assets are attributed to high cost of loans, credit risk management techniques indirectly affect the value of a bank’s interest rate spread. Since an inefficient interest rate policy might raise interest rates and, in turn, NPAs, the study suggests that commercial banks in RBI should evaluate their clientele and charge interest rates properly. To lower the number of nonperforming loans (NPAs), they implement strict rules on interest rates charged by banks in order to regulate their interest rate spread and improve periodic/regular credit risk monitoring of their loan portfolios.

Measure twice before you cut: differences in Furfine-type algorithm implementations

Our study focuses on the practical implementation aspects of “Furfine-type” algorithms used to identify money market loans from payments data. We use two different versions of Furfine-type algorithms applied to data from TARGET2, the Eurosystem’s large-value payment system. We illustrate the magnitude and development over time of the differences between the implementations and study the explanations depending on the technical specifications of the algorithms. Paramount are the applied range of plausible rates and the identification of zero-rate loans. Consequently, the monetary policy environment and market conditions have an influence on the differences in the resulting data sets. These even affect aggregate indicators including interest rate dispersion, especially in times of stress, such as during the sovereign debt crisis and, to a lesser extent, the global pandemic. We find that an environment with methodological plurality can reduce overall uncertainty by using cross-checks between different data sources. The results strengthen the foundation for applying Furfine-type algorithms and are useful as guidance for their implementation and calibration in the euro area and beyond.

THE IMPACT OF LEARNING ON BUSINESS CYCLE FLUCTUATIONS IN THE CONSUMER UNSECURED CREDIT MARKET

We document that the credit spread on consumer unsecured debt exhibits a persistent, hump-shaped response to an increase in the charge-off rate. This stylized fact poses a significant challenge for a standard model of consumer default in which lenders have rational expectations and, therefore, the credit spread continuously adjusts to reflect the true default incentives of each borrower. In an effort to explain this feature of the data, we construct a model of consumer default with countercyclical income risk in which lenders learn about default risk over time by observing the history of repayment decisions, as is the case in practice. In addition to matching credit spread dynamics, allowing lenders to learn about default risk substantially improves the model’s ability to generate realistic business cycle fluctuations in the consumer unsecured credit market and match the cross-sectional distribution of unsecured debt and dispersion of interest rates observed in the data.

The Impact of Credit Scoring on Credit Spreads and Consumption Over the Business Cycle

Unsecured debt is the marginal source of finance for most consumers. Short run fluctuations in the credit spread on consumer unsecured debt, therefore, likely have important implications for consumer welfare. We document that the credit spread on consumer unsecured debt exhibits a persistent, hump-shaped response to an increase in the charge-off rate. This stylized fact poses a significant challenge for a standard model of consumer default in which lenders have rational expectations and, therefore, the credit spread continuously adjusts to reflect the true default incentives of each borrower. In an effort to explain this feature of the data, we construct a model of consumer default with countercyclical income risk in which lenders learn about default risk over time by observing the history of repayment decisions, as is the case in practice. In addition to matching credit spread dynamics, allowing lenders to learn about default risk substantially improves the model's ability to generate realistic business cycle fluctuations in the consumer unsecured credit market and match the cross-sectional distribution of unsecured debt and dispersion of interest rates observed in the data.

The Democratization of Credit and the Rise in Consumer Bankruptcies

Financial innovations are a common explanation for the rise in credit card debt and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers’ risk of default and a fixed cost of developing each contract lenders offer. Innovations that ameliorate asymmetric information or reduce this fixed cost have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers. This results in more defaults and borrowing, and increased dispersion of interest rates. Using the Survey of Consumer Finances and Federal Reserve Board interest rate data, we find evidence supporting these predictions. Specifically, the dispersion of credit card interest rates nearly tripled while the “new” cardholders of the late 1980s and 1990s had riskier observable characteristics than existing cardholders. Our calculation suggest these new cardholders accounted for over 25% of the rise in bank credit card debt and delinquencies between 1989 and 1998.

Bank Office Outreach, Structure and Performance in Regional Banking Markets

Burgstaller J. Bank office outreach, structure and performance in regional banking markets, Regional Studies. This paper studies bank penetration, market structure and banking conduct across Austrian districts. Neither differences in market concentration nor in the activity of out-of-market banks can explain the regional dispersion of interest rates, bank profitability and efficiency. A higher bank density is connected to more competition and lower mark-ups, and indicates more efficient banking markets as well. As efficiency is the main determinant of bank profits and competition seems to be (mildly) indicative of stronger regional growth, the preservation of a fair regional bank outreach appears to be an important policy target. Burgstaller J. 区域性银行市场中银行的外部性拓展、结构以及绩效，区域研究。本文研究了澳洲银行的渗入、市场结构以及银行行为。 市场集中或者市场外的银行活动都无法解释利率、银行收益以及效率的区域性差异。 较高的银行密度与激烈的竞争及较低的加价相关。同时表明存在更加有效的银行市场。正如效率是决定银行获益的主要因素, 竞争反映出增强的区域增长，维持银行进行公平的区域性拓展似乎是重要的政策目标。 银行拓展 地区性市场 市场结构 竞争 银行绩效 区域发展 Burgstaller J. Le rayon d'action des guichets bancaires, la structure et les résultats des marchés bancaires régionaux, Regional Studies. Cet article cherche à étudier la pénétration bancaire, la structure du marché et le comportement des banques à travers les districts autrichiens. Ni les différences de la concentration du marché, ni la variation de l'activité bancaire hors marché n'expliquent ni la dispersion des taux d'intérêt, ni la profitabilité, ni l'efficacité des banques. Une densité des banques plus élevée se rapporte à une augmentation de la concurrence et aux marges moins élevées, et indique aussi des marchés bancaires plus efficaces. Etant donné que l'efficacité est le déterminant sine qua non des profits bancaires et que la concurrence semble (dans une certaine mesure) indiquer une croissance régionale plus forte, la pérennité d'un rayon d'action bancaire régional loyal semble être un objectif important de la politique. Rayon d'action bancaire Marchés locaux Structure du marché Concurrence Résultats des banques Aménagement du territoire Burgstaller J. Bankstellendichte, Marktstruktur und Performance in regionalen Bankenmärkten, Regional Studies. Die vorliegende Arbeit untersucht Bankendispersion, Marktstrukturen und Bankverhalten auf der Ebene von Bezirken in Österreich. Weder Unterschiede in der Marktkonzentration noch in der Dichte nicht bezirksansässiger Banken tragen zur Erklärung der Variation in Bankzinsen, Profitabilität und Effizienz bei. Eine höhere Bankendichte steht in Verbindung mit verstärkter Konkurrenz und niedrigeren Aufschlägen und ist auch ein Indiz für höhere Bankeneffizienz. Da Effizienz die Hauptdeterminante für die Gewinne der Banken darstellt und stärkerer Wettbewerb zwischen Banken positiv mit regionaler Entwicklung verbunden scheint, ist die Erhaltung einer gewissen Bankendichte durchaus ein erstrebenswertes wirtschaftspolitisches Ziel. Bankstellendichte Lokale Märkte Marktstruktur Wettbewerb Bankenperformance Regionalentwicklung Burgstaller J. Densidad, estructura y rendimiento de filiales bancarias en los mercados bancarios regionales, Regional Studies. En este artículo analizamos la penetración bancaria, la estructura del mercado y las operaciones bancarias en los distritos de Austria. Ni las diferencias en la concentración del mercado ni la actividad de los bancos fuera del mercado explican la dispersión regional de los tipos de interés, la rentabilidad y la eficacia de los bancos. Una densidad más alta de los bancos está relacionada con más competencia y menos márgenes e indica también mercados bancarios más eficientes. Puesto que la eficiencia es el principal determinante de los beneficios bancarios y la competencia parece ser un indicio (moderado) de un crecimiento regional más fuerte, el mantenimiento de una densidad bancaria regional justa parece ser un objetivo político importante. Densidad bancaria Mercados locales Estructura del mercado Competencia Desempeño bancario Desarrollo regional

A Quantitative Theory of Information and Unsecured Credit

Important changes have occurred in unsecured credit markets over the past three decades. Most prominently, there have been large increases in aggregate consumer debt, the personal bankruptcy rate, the size of bankruptcies, the dispersion of interest rates paid by borrowers, and the relative discount received by those with good credit ratings. We find that improvements in information available to lenders on household-level costs of bankruptcy can account for a significant fraction of what has been observed. The ex ante welfare gains from better information are positive but small. (JEL D14, D82, G21)

The Crash Risk Premia of Efficient Carry Trades

Carry trade strategies in which investors sell forward currencies that are at a forward premium and buy forward currencies that are at a forward discount are, on average, profitable. According to the uncovered interest rate parity they should not. A risk premia story might justify the high returns to the carry trades. In this paper we study the relationship between the cross section of excess returns of portfolios invested in carry trade positions and a renewed set of candidate risk factors. Asset pricing theory applies to the currency market: those currencies that have larger loading on risk, especially crash risk, offer a larger mean return in compensation. Especially, we show that crash risk as measured by quantile based statistics such as VaR or CVaR prices better the return to the carry trades than moments based factors such as standard deviation or skewness. This result holds at the portfolio level and at the single currency level. As a result, we show that carry trade strategies that take account of the dispersion of interest rates dominate strategies in which bets are normalized.

Norwegian Overnight Interbank Interest Rates

This article addresses the lack of reliable information about overnight interest rates in the Norwegian interbank market. We infer actual interest rates from interbank transactions recorded in the real-time gross settlement (RTGS) system of Norges Bank over the period October 2006–November 2010. We propose a new measure of overnight interest rates, NONIA, which may be calculated daily as a value-weighted average of overnight interest rates on individual loans. This may supplement information provided by indicative interest rates such as NIBOR. We also compute an indicator based on dispersion of interest rates across individual loans and the spread between NONIA and the key policy rate. The indicator may be useful for assessing whether overnight interest rates are close to Norges Bank’s key policy rate, consistent with its liquidity policy objective.

Informational differentiation, interest rate dispersion and market power1

This article investigates the existence and determinants of interest rate dispersion in loans and deposits of Spanish banks under the lens of informational differentiation. We find that interest rate dispersion and market power co-vary in the same direction across bank products under differences in variables that affect customers' incentives to search.

The Role of Information in the Rise in Consumer Bankruptcies

Consumer bankruptcies rose sharply over the last 20 years in the U.S. economy. During the same period, there was impressive technological progress in the information sector. This paper provides a theory to understand and quantify the role of improvements in information technologies in consumer credit markets. Informational frictions restrict the amount of debt that can be borrowed. In fact, in the equilibrium in which investing in information is too expensive, many households borrow such small amounts that the default risk is very low. When information costs drop and informational frictions vanish, those households borrow more and default is likely after a bad shock. Quantitative exercises show that information costs have a significant effect on the bankruptcy rate. Additionally, a drop in information costs generates changes in other variables (e.g. interest rate dispersion) similar to what has occurred over the last 20 years.

Search Cost and Price Dispersion in Vertically Related Markets: The Case of Bank Loans and Deposits

Using data on marginal interest rates of loan and deposit products by Spanish banks, we find that the level of interest rates on loans (deposits) across geographic markets decrease (increase) with the number of banks in each market, and that the level of interest rates on loans increases with the level of interest rates of deposits. We also find that the dispersion of interest rates of both loans and deposits increase with the number of banks. This evidence is interpreted as evidence of customer's search costs in retail banking, consistent with predictions from the Carlson and McAfee (1983) model of market competition with search costs.

Search Cost and Price Dispersion in Vertically Related Markets: The Case of Bank Loans and Deposits

Using data on marginal interest rates of loan and deposit products by Spanish banks, we find that the level of interest rates on loans (deposits) across geographic markets decrease (increase) with the number of banks in each market, and that the level of interest rates on loans increases with the level of interest rates of deposits. We also find that the dispersion of interest rates of both loans and deposits increase with the number of banks. This evidence is interpreted as evidence of customer’s search costs in retail banking, consistent with predictions from the Carlson and McAfee (J Polit Econ 91:480–493, 1983) model of market competition with search costs.

A Test of the Law of One Price in Retail Banking

This paper investigates the level and the determinants of retail banking interest rate differences among Spanish banks in the period 1989–2003. We find that the interest rates of twenty five different bank loan and deposit products adjust rather rapidly to their long‐term values in response to external shocks, as the relative version of the Law of One Price predicts, but the evidence runs contrary to the absolute version of the Law. Credit risk premium, part of the marginal cost of the loans granted by a particular bank, is an important source of interest rate dispersion across banks and loan products, both before and after Spain joined the Euro zone. Therefore, differences in credit risk policies across banks must be taken into account when forming expectations about European retail banking integration.

Interest rate dispersion and volatility in the market for daily funds

The purpose of this paper is to study the determinants of equilibrium in the market for daily funds. We use the EONIA panel database which includes daily information on the lending rates applied by contributing commercial banks. The data clearly show an increase in both the time series volatility and the cross-section dispersion of rates towards the end of the reserve maintenance period. These increases are highly correlated. We design a model to account for these empirical facts. Our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period. This reduction in the elasticity together with market segmentation and heterogeneity is able to generate distributions for the interest rates and quantities traded with the same properties as in the data. We also investigate the effects of the changes in the Eurosystem's operational framework, enacted on March 2004, for interest rate behaviour.

Mortgage Interest Rate Dispersion in the Euro Area

Despite the remarkable economic and financial convergence over the last ten years in the euro area, mortgage interest rates still differ across countries. This note presents some stylised facts on the heterogeneity of mortgage interest rates across euro area countries on the basis of the Eurosystem’s harmonised MFI interest rate statistics. We also attempt to provide some insights into the reasons behind these cross-country differences using the methodology recently proposed by Affinito and Farabullini (2006). We differ from Affinito and Farabullini (2006) in that we focus on one particular banking market: the market for mortgage loans. This allows us to identify more clearly the role of specific structural features characterising that market in explaining mortgage rate dispersion. More specifically, we investigate the extent to which various mortgage loan demand and supply determinants help explaining the observed dispersion. It turns out that some of the heterogeneity can be explained by these factors, in particular those that relate to the supply side. However, a substantial part of the dispersion remains unexplained suggesting that much of the heterogeneity also reflects country-specific institutional differences that are likely to be caused by differences in the regulatory and fiscal framework of the mortgage markets. In order to test this, we extend our analysis to also include institutional factors and indeed find that crosscountry differences in enforcement procedures, tax subsidies and loan-to-value ratios influence the level of mortgage rates. JEL Classification: C23, E4, F36, G21, N24

Search Costs, Market Structure and Interest Rate Dispersion

Panel data on bank loan and deposit interest rates reveal that dispersion of interest rates within geographic markets increases with the number of banks in the market and decreases with the density of branches and size of the market. It also reveals that dispersion increases with absolute product specific inflation and is higher for bank products of longer maturity and of smaller average volume per transaction. The evidence is consistent with theories of price formation under consumers' search costs. The paper is one of the very few to test theories of price formation under product information differentiation with market structure data.

Research note: pricing behaviour across multiple distribution channels in the UK deposit account market: 1997-2001

In this research note the pricing behaviour of UK depository institutions is examined. The study uses daily interest rate data for 186 UK deposit saving accounts over the sample period, 1997-2001, which are distributed through branches and across postal and telephone networks. The relative level and dispersion of interest rates and the frequency and responsiveness of interest rate change are examined for deposit products that are distributed through different distribution channels. Slight and mostly insignificant interest rate differentials are recorded between deposit accounts distributed through branch, postal and telephone channels. Similarly, only small differences are recorded for the dispersion, frequency and responsiveness of interest rate change of deposit products distributed through different distribution channels.

THE DISPERSION OF BIDS ON INDIVIDUAL NEW MUNICIPAL ISSUES

AbstractThis paper examines the determinants of the dispersion of interest rates bid on competitively sold, new municipal issues. Theory suggests that the dispersion of prices (interest rates) on a new municipal issue depends on the expected costs and benefits of underwriter search on that issue. The greater the expected costs and the lower the expected benefits, the smaller will be underwriter search and the greater will be municipal interest rate dispersion. For empirical testing, the expected costs and benefits of underwriter search are measured by characteristics of the bond issue, the bond issuer, and the market conditions. The empirical tests suggest that the theory holds.

The Search for Information by Underwriters and Its Impact on Municipal Interest Cost

AN UNDERWRITER WHO BIDS on a competitively sold, new municipal issue must search for information concerning market clearing yields prior to submitting his bid.1 This search for information is an attempt to find those buyers who are willing to purchase the bonds at the highest prices (lowest yields). The lower the discovered yields, the lower is the bid the underwriter may submit, and the greater will be his chance of winning the bidding competition. Also, ceteris paribus, the lower are yields, the lower will be municipality interest costs. Thus, it is important to discover those factors which lead to greater aggregate search and the discovery of lower yields. This paper investigates the impact of underwriter search on the interest cost of new municipal bond issues. Kessel [10] was the first to suggest that underwriter search may affect municipal interest costs. In Kessel's study, reported in section II, the number of bids received on a bond issue is used as a measure of underwriter search for price information on the issue. Section III provides a more complete explanation of underwriter search than was attempted by Kessel. The discussion suggests that aggregate underwriter search has two dimensions: the number of searchers and the intensity of search. The implications of this model for measuring aggregate underwriter search are developed in section IV. Both the number of bids and the dispersion of interest rates bid on a bond issue may reflect aspects of total underwriter search on the issue. Section V presents the methodology of this study. Section VI presents the empirical analysis. The analysis indicates that both the intensity of underwriter search and the number of searching underwriters have an independent and significant impact on municipal interest cost. A brief summary of the results is given in section VII.