Banks’ interest rate setting and transitions between liquidity surplus and deficit

Tatiana Grishina () and Alexey Ponomarenko
Additional contact information
Tatiana Grishina: Bank of Russia, Russian Federation

No wps79, Bank of Russia Working Paper Series from Bank of Russia

Abstract: Assuming that a central bank is successful in steering money market interest rates, commercial banks’ loan rate setting behaviour is not expected to change during a transition between liquidity surplus and deficit. However, this logic does not hold if a bank employs different money market instruments for the lending and borrowing activities. In this environment, it may be appropriate to adjust the loan rates when a bank transitions between liquidity surplus and deficit (i.e. switches between the benchmark money market rates). This strategy is fundamentally different from linking the loan rates to the average cost of funding (i.e. the average between retail and wholesale funding rates). The magnitude of such loan rate adjustment is limited by the (usually moderate) spread between the funding and investment money market rates.

Keywords: Excess reserves; Lending rates; Fund transfer pricing; Russia (search for similar items in EconPapers)
JEL-codes: C63 E43 E51 E58 G21 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2021-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cis, nep-mac, nep-mon and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.cbr.ru/StaticHtml/File/126965/wp_79.pdf (application/pdf)

Related works:
Journal Article: Banks’ interest rate setting and transitions between liquidity surplus and deficit (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bkr:wpaper:wps79

Access Statistics for this paper

More papers in Bank of Russia Working Paper Series from Bank of Russia Contact information at EDIRC.
Bibliographic data for series maintained by BoR Research ( this e-mail address is bad, please contact ).