Heterogeneity in bank pricing policies: The Czech evidence

We estimate the pass-through from market interest rates to bank interest rates using heterogeneous panel cointegration techniques to address heterogeneity at the bank level in the Czech Republic. The results indicate heterogeneity in bank pricing in the short, but not in the long term. Mortgage rates and firm rates typically adjust to money market changes, but often less than fully in the long run. Large corporate loans have a smaller mark-up than small loans. Consumer rates have a high mark-up and do not exhibit a cointegration relationship with money market rates even in the long run. Next, we examine how bank characteristics determine the nature of interest rate pass-through in a cross-section of Czech banks. We find evidence for relationship lending, as banks with a stable pool of deposits smooth interest rates and require a higher spread as compensation. Large banks are not found to price their products less competitively. Greater credit risk increases vulnerability to money market shocks.

► The results of interest rate pass-through estimation in the Czech Republic indicate heterogeneity in bank pricing in the short, but not in the long term. ► Interest rate pass-through is often incomplete. ► Large corporate loans have a smaller mark-up than small loans. ► Evidence for relationship lending is found, as banks with a stable pool of deposits smooth interest rates and require a higher spread as compensation. ► Greater credit risk increases vulnerability to money market shocks.