Interest rate pass-through in Serbia: evidence from individual bank data Mirjana Miletic, Aleksandar Tomin, Andjelka Djordjevic Rome, 23 November 2018

Motivation - channels of transmission Understanding transmission mechanism in Serbia: - channels of transmission - it’s evolution over time; Though interest rate pass through in Serbia has been already touched in a few different contexts, this is the first time it was examined from individual bank level; Testing do individual bank characteristics (size, strength of deposit base, quality of credit portfolio, capital position and liquidity) determine the size and speed of pass-through.

Presentation Outline Stylized facts; Data description; Methodology; Estimation results (dinar and euro indexed lending rates); Testing impact of different individual banks’ characteristics on interest-rate pass through; Summary and Conclusions; Looking forward

Stylized Facts Inflation targeting regime since 2009; The main monetary policy instrument: rate applied in the NBS 1-week reverse repo transactions; Relatively high level of eurization: approximately 37% of new business loans to private sector is in dinars; Comparable and consistent time series of bank lending rates on new business loans since September 2010.

Stylized facts

Interest Rate Pass-Through To Lending Rates: Data description Monthly data of per annum average interest rates on new business corporate (C_NB) and household (H_NB) loans for period September 2010 - July 2018; Interbank rates with one week maturity (BELIBOR1W) and with three months maturity (BELIBOR3M) as a proxy of monetary policy rates; 22 banks included in analysis for households (94.7% in average of the total banking sector assets) and 19 banks for corporates (88.9% in average of the total banking sector assets).

Interest Rate Pass-Through To Lending Rates: Methodology Panel cointegration tests: - Pedroni (1997); Westerlund (2006) Estimation: - FMOLS, DOLS, PMG, MG

Estimation results: dinar lending rates The pass-through effect is more pronounced on new business corporate loans than on household loans: Interest rate channel has strengthened over time:

Estimation results: dinar lending rates lower country risk premium in addition to monetary policy relaxation of NBS affect the fall of dinar lending interest rates for corporate sector   Table 3: Estimates of the long run pass-through of market rates to bank lending rates FMOLS DOLS Corporate loans BELIBOR1W 1.16*** 1.15*** EMBI 0.378*** 0.395*** BELIBOR3M 1.10*** 0.402*** 0.403*** Note: Pooled FMOLS and pooled DOLS with automatic lags selection based on SIC. * refers to statistical significance at 10%, ** refers to statistical significance at 5%, and *** refers to statistical significance at 1%.

Estimation results: dinar lending rates - dinar corporate loans for current assets display excessive sensitivity to interbank money market rates, while consumer loans are less sensitive than other types of households’ loans

Estimation results: euro-indexed lending rates - significant influence of country risk premium to the euro indexed lending rates, on both corporate and households’ loans

Impact of different individual banks’ characteristics on IRPT Table 9: Mg estimates of the pass-through of market rates BELIBOR3M to bank lending rates   Corporate Households Cluster I Cluster II Size criterion 1.262 1.194 1.171 1.206 Quality of portfolio criterion 1.232 1.227 1.193 1.183 Deposit base criterion 1.294 1.172 1.151 1.226 Capital position criterion 1.215 1.241 1.116 1.261 Liquidity criterion 1.271 1.184 1.233 1.144

Summary and Conclusions Confirmed statistically significant long run relationship between monetary policy rates/money market rates and lending rates; The interest rate channel gained more strength over time; Country’s risk premium also affect lending interest rates; Individual bank characteristics affect interest rate pass-through: Household sector: adjustment is faster for smaller and more liquid banks, less-capitalized banks, banks with less non-performing loans and lower share of deposits in total liabilities; Corporates: adjustment is faster for bigger and less capitalized banks with lower NPL ratios, those with higher share of liquid assets in total assets and higher deposit base.

Looking Forward Testing the possibility of asymmetric reaction of lending and deposit rates to the monetary policy stance. Estimates by sub-periods, maturity and types of loans, in order to verify the reliability of obtained estimates.