Nonlinear interest rate-setting behaviour of German commercial banks

Ludwig Heinzelmann 1  and Martin Missong 2
  • 1 PwC Strategy & (Germany) GmbH, Friedrichstraße 14, 70174 Stuttgart, Germany
  • 2 University of Bremen, Faculty of Business Studies and Economics, Enrique-Schmidt-Str. 1, 28359 Bremen, Germany
Ludwig Heinzelmann and Martin Missong
  • University of Bremen, Faculty of Business Studies and Economics, Enrique-Schmidt-Str. 1, 28359 Bremen, Germany
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Abstract

We quantitatively analyse the interest rate-setting behaviour of German commercial banks during the period 2003–2014, using nonlinear (smooth transition) cointegration approaches. Our empirical results reveal principles applied by commercial banks in (re-)gaining margins in the aftermath of the financial crisis. We substantiate our findings using economic arguments from a bank management perspective. As our study contributes to a better understanding of the pass-through mechanism from market to commercial banks’ customer interest rates, the results will also be relevant to meaningful assessments of the effectiveness of monetary policy measures.

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