The Interest Rate Pass Through during the Crisis: Evidence from Slovakia
|Author:||Mgr. Marián Ševcech|
|Year:||2015 - summer|
|Leaders:|| prof. PhDr. Tomáš Havránek Ph.D.
|Work type:|| Finance, Financial Markets and Banking
|Awards and prizes:|
|Abstract:||The effectiveness of interest rate pass-through is crucial when shaping monetary policy. In this paper we
use error correction framework in order to estimate the speed and the completeness of pass through in
Slovakia. Our thesis brings a unique research on how the financial crisis and Euro adoption affect the
pass-through. In Slovakia those events occur at the same time; we attempt to distinguish between what
phenomenon has greater impact. We also distinguish between what bank characteristics have impact on
individual bank’s spread during financial crisis.
Our results suggest that the interest rate pass-through completeness increases in long term. We however
found evidence of decreasing pass-through in case of deposit rates during crisis. Banks are unwiling to
lower them and hence harm their competitve position.
The pass-through in Slovakia is found to be relatively fast and consistent throughout periods. With the
crisis, the speed for mortgages rates however decreases. We conclude that the impact of financial crisis
outweights the impact of Euro adoption.
Concerning the banks‘ characteristics, we conclude that higher portion of loans on assets, higher costs
over income and better liquidity position decrease the spread. This is explained by the size of Slovakian
banking market; banks lower their spread to remain competitive. We further conclude that less
capitalized banks increase their risk premium. Banks‘ size is not found to have any effect on the spread.