Competition, transmission and bank pricing policies: Evidence from Belgian loan and deposit markets

This paper introduces heterogeneity in the pass-through from market interest rates to retail bank interest rates. A substantial proportion of the heterogeneity in bank pricing policies can be explained by the bank lending channel and the relative market power hypothesis. In addition, the paper provides a new approach for testing the completeness hypothesis. The results suggest that on aggregate, the long-term pass-through of market to retail interest rates is typically less than one-for-one. While there is no convincing evidence for asymmetry in retail rates, large deviations from equilibrium mark-ups are faster reduced than small deviations. Overall, conditions for corporate loans are more competitive compared to consumer loans. Demand and savings deposits have, by far, the most rigid prices