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Dynamic impact of market interest rates of bank interest income : The Korean case

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Frame of Image the Korean loan markets, in the model. The main findings are summarized as follows. First, that the predominance of floating-rate loans makes the margin correlate positively with market interest rates. Second, that the response of the margin to a change in market interest rates is non-linear; it widens in the short term until the interest rate reset on loans is complete, reaches a peak level around three months later, and then narrows afterward to gradually return to the pre-shock level. Third, that the negative correlation between the margin and market interest rates observed before the 2008 crisis was due largely to the heightened competition or funding pressure caused by the credit boom during that period. Keywords : Loan-to-Deposit Margin, Market Interest Rates, Floating Rate Loans JEL Classification Number : E43, E52, G21
Received 23 August 2013; Revised 20 January 2014; Accepted 11 April 2014. * Director, Global Economic Research Divison, the Bank of Korea, Jung-Gu Namdaemun-Ro 39, Seoul Korea 100-794(Tel : +82-2-759-5281, Fax : +82-2-759-4290, E-mail : jinspark@bok.or.kr)
Dynamic Impact of Market Interest Rates on Bank Interest Income
75
Ⅰ.  Introduction
Interest income is an important source of bank profits. It also plays a key role in determining bank lending, in that it serves to augment bank capital through retained interest income and thus provides an incentive for loan provision. Considering the importance of bank lending in monetary policy transmission, understa


Full Text
Title Dynamic impact of market interest rates of bank interest income
Similar Titles
Sub Title

The Korean case

Material Type Reports
Author(English)

Park, Jin-Su

Publisher

Korea Institute of Finance

Date 2014-06
Journal Title; Vol./Issue Journal of Money & Finance:28/2
Pages 25
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < General
Economy < Economic Conditions
Holding Korea Institute of Finance

Abstract

in response to changes in market interest rates. We use the loan-to-deposit interest rate margin (the ‘margin’) as an indicator for bank profits and incorporate the predominance of floating rate loans, a distinctive feature of the Korean loan markets, in the model. The main findings are summarized as follows. First, that the predominance of floating-rate loans makes the margin correlate positively with market interest rates. Second, that the response of the margin to a change in market interest rates is non-linear; it widens in the short term until the interest rate reset on loans is complete, reaches a peak level around three months later, and then narrows afterward to gradually return to the pre-shock level. Third, that the negative correlation between the margin and market interest rates observed before the 2008 crisis was due largely to the heightened competition or funding pressure caused by the credit boom during that period.