Template-Type: ReDIF-Paper 1.0

Author-Name: Tatiana Grishina
Author-Email: gtj@cbr.ru
Author-Workplace-Name: Bank of Russia, Russian Federation

Author-Name: Alexey Ponomarenko
Author-Email: PonomarenkoAA@cbr.ru
Author-Workplace-Name: Bank of Russia, Russian Federation


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

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.


Length: 22 pages
Creation-Date: 2021-10
Revision-Date:
Publication-Status:
File-URL: https://www.cbr.ru/StaticHtml/File/126965/wp_79.pdf
File-Format: Application/pdf
File-Function:
Number: wps79
Classification-JEL: E43, E51, E58, G21, C63
Keywords: Excess reserves, Lending rates, Fund transfer pricing, Russia
Handle:RePEc:bkr:wpaper:wps79