The Pass Through From Market Interest Rates to Retail Bank Rates in Germany

In this paper, we address the pass-through from money and capital market interest rates to bank retail rates in Germany for the period January 2003 to December 2006 using a panel of almost 200 banks. In addition, banks' heterogeneous price setting behaviour is analysed by investigating the kind of attributes of a credit institution in terms of its balance sheet characteristics and its institutional arrangements that alter its adjustment process. The main conclusions are the incompleteness of pass-through in both the short and the long run and the existence of considerable heterogeneity across retail products and banks. Both maturity and loan size matter in determining the degree of pass-through as well as whether products are targeted at firms or households. Banks' balance sheet structure has a sizeable impact on the speed and magnitude of their adjustment. Large, illiquid, less diversified credit institutes and those heavily involved in interbank lending change their rates more rapidly and incorporate more of a change in market conditions in their rates in the long run. Even the different banking groups that are peculiar to Germany adjust their rates not in a uniform manner, but savings banks and credit cooperatives adjust their rates more slowly than the remaining banks.