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The RePEc plagiarism page How do banks set interest rates?Leonardo GambacortaEuropean Economic Review, 2008, vol. 52, issue 5, 792-819Abstract:This paper studies cross-sectional differences in banks interest rates. It adds to the literature in two ways. First, it analyzes systematically the micro and macroeconomic factors that influence the price-setting behaviour of banks. Second, by using banks' prices (rather than quantities) it provides an alternative way of disentangling loan supply from loan demand shift in the "bank lending channel" literature. The results suggest that heterogeneity in the banking rates pass-through - depending on liquidity, capitalization and relationship lending - exists only in the short run.Date: 2008
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Full text for ScienceDirect subscribers onlyRelated works:
Working Paper: How Do Banks Set Interest Rates? (2005)
Working Paper: How Do Banks Set Interest Rates? (2004)
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How do banks respond to asset booms? This paper examines i) how U.S. banks responded to the World War I farmland boom; ii) the impact of regulation; and iii) how bank closures exacerbated the post-war bust. The boom encouraged new bank formation and balance sheet expansion (especially by new banks). Deposit insurance amplified the impact of rising crop prices on bank portfolios, while higher minimum capital requirements dampened the effects. Banks that responded most aggressively to the asset boom had a higher probability of closing in the bust, and counties with more bank closures experienced larger declines in land prices.
Defendant, a bank organized under the National Bank Act and transacting business in the State of New York, used the words "saving" and "savings" in various ways in the advertising and conduct of its banking business. The state brought suit, seeking an injunction restraining the use of these words, alleging that in- so using them defendant had violated subdivision 1 of section 258 of the New York Banking Law. In defense, the bank contended that this provision, as it applied to national banks, was unconstitutional as a contravention of federal statutory provisions. The trial court dismissed the complaint on its merits, but this was reversed by the appellate division, whose decision was affirmed by the New York Court of Appeals. On appeal to the Supreme Court of the United States, held, reversed, one justice dissenting. Defendant as a national bank is authorized to receive savings deposits. A necessary incident to this is the power to advertise the availability of these accounts to the public. Therefore, a state's attempt to restrict this power is invalid. Franklin National Bank of Franklin Square v. New York, 347 U.S. 373, 74 S.Ct. 550 (1954).
N2 - We examine the role of private unlimited deposit insurance as a complement to federal deposit insurance for deposit flows, bank lending, and moral hazard during a crisis. We find that banks whose deposits are federally and privately fully insured obtain more deposits and expand lending, in contrast to banks whose deposits are only federally insured. We also document that privately insured banks remain prudent in the loan origination process during the subprime crisis. Our results offer novel insights into depositor and bank behavior in the presence of multiple deposit insurance schemes with differential design features. They also illustrate how private sector solutions incentivize prudent bank behavior to strengthen the financial safety net.
AB - We examine the role of private unlimited deposit insurance as a complement to federal deposit insurance for deposit flows, bank lending, and moral hazard during a crisis. We find that banks whose deposits are federally and privately fully insured obtain more deposits and expand lending, in contrast to banks whose deposits are only federally insured. We also document that privately insured banks remain prudent in the loan origination process during the subprime crisis. Our results offer novel insights into depositor and bank behavior in the presence of multiple deposit insurance schemes with differential design features. They also illustrate how private sector solutions incentivize prudent bank behavior to strengthen the financial safety net.
This is because banks do not tend to mobilise their safest and most liquid assets as collateral with the Eurosystem, partly reflecting the introduction of collateral easing measures during the pandemic.
All this suggests, and with this I would like to conclude, that portfolio rebalancing effects are relevant market drivers, both when central banks intend to expand their balance sheet and when they plan to reduce it.
The four largest U.S. lenders have set aside more reserves amid worsening macroeconomic conditions as a growing number of consumers struggle with loan repayments. Such banks wrote off a combined $3.4B in bad consumer loans in Q1 2023, up 73% from the previous year. This, combined with additional reserves, brought provisions at all four institutions to levels not seen since the early days of the Covid-19 pandemic. Bank executives attribute the increase in provisions to a return to normal losses following pandemic-era government stimulus programs that artificially kept consumer defaults low, stating that they have not seen any significant cracks in their portfolios. Nevertheless, banks are taking necessary actions while keeping a close eye on their clients' sensitivity to inflation and increasing rates. Citigroup reassured investors that the increased credit losses were expected, while Goldman Sachs, Wells Fargo, and JPMorgan Chase & Co. all reported a rise in net charge-offs for their credit-card portfolios.
At the New York Fed, our mission is to make the U.S. economy stronger and the financial system more stable for all segments of society. We do this by executing monetary policy, providing financial services, supervising banks and conducting research and providing expertise on issues that impact the nation and communities we serve.
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