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Peering beyond the veil: A dissection of aggregate bank lending rate movements into pricing and composition effects using credit-level data
Compared to 2021, the aggregate bank lending rate to firms in the euro area increased significantly during the monetary policy tightening and easing cycle of 2022-25. But the increase was up to 1.5 percentage points (PP) less than the rise in policy and money market rates. What explains the increase in the aggregate bank lending rate, and why did it not rise in lockstep? We approach these questions using granular credit registry data, revealing how changes in the composition and pricing of credit translate into developments in the aggregate rate and the gap. Composition effects were minor, while pricing effects were instrumental in opening the gap. The key individual factor opening the gap was that banks‘ fixed components of credit pricing increased less than the 3-month (3M) Euribor, signaling an incomplete pass-through of changes in refinancing costs. However, changes in mark-ups (i.e. in premia and discounts) also played a critical role, counteracting the incomplete pass-through and reducing the gap.
In comparison to 2021, policy and money market rates increased by up to 4.5 PP during the 2022？25 monetary policy tightening and easing cycle. However, the aggregate bank lending rate to firms in the euro area increased by only by up to 3 PP. Policymakers observed this increase closely to assess the strength of monetary policy transmission via banks and to avoid an over-tightening of monetary policy. Until recently, the lack of credit-level data hindered efforts to better understand how developments of the aggregate bank lending rate are shaped from micro-level developments.
We use AnaCredit to tackle this and decompose the differential increase between the aggregate bank lending rate and the 3M Euribor into ‘composition’ and ‘pricing’ effects. Composition effects arise because ‘which banks’ financed ‘which firms’ and ‘how’ changed compared to 2021 Pricing effects are due to changes in how banks priced credit during 2022-25.
In comparison to 2021, policy and money market rates increased by up to 4.5 PP during the 2022？25 monetary policy tightening and easing cycle. However, the aggregate bank lending rate to firms in the euro area increased by only by up to 3 PP. Policymakers observed this increase closely to assess the strength of monetary policy transmission via banks and to avoid an over-tightening of monetary policy. Until recently, the lack of credit-level data hindered efforts to better understand how developments of the aggregate bank lending rate are shaped from micro-level developments.
We use AnaCredit to tackle this and decompose the differential increase between the aggregate bank lending rate and the 3M Euribor into ‘composition’ and ‘pricing’ effects. Composition effects arise because ‘which banks’ financed ‘which firms’ and ‘how’ changed compared to 2021 Pricing effects are due to changes in how banks priced credit during 2022-25.
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