Search results
1 – 10 of over 44000Daniel Kipkirong Tarus and Philip Otieno Manyala
The purpose of this paper is to examine the determinants of bank interest rate spread in Sub-Saharan African countries, which were categorized into macro-specific, bank-specific…
Abstract
Purpose
The purpose of this paper is to examine the determinants of bank interest rate spread in Sub-Saharan African countries, which were categorized into macro-specific, bank-specific and institutional variables.
Design/methodology/approach
The authors used fixed effects estimations to analyze the data. The data were drawn from a pool of 20 Sub-Saharan African countries for a period of ten years spanning 2003–2012. The countries were categorized into low-income, lower middle-income and upper middle-income countries based on World Bank income classifications.
Findings
The results show that inflation has a negative and significant effect on interest rate spread, while operating costs and bank concentration have a positive and significant effect on interest rate spread. Similarly, government effectiveness, rule of law and political stability are negatively related to the interest rate spread.
Practical implications
The paper provides evidence that interest rate spread is determined by both bank-specific, macro-economic and institutional variables. The paper also indicates that the income status of a country is important in explaining the variations in the interest rate spread across the region. Therefore, the policy makers should design policies that take into account the variables in order to help in planning by all economic agents, including banks.
Originality/value
The paper uses data from Sub-Saharan Africa and introduces institutional variables in the model, which have been found to be critical in the context.
Details
Keywords
Samuel Kwabena Obeng and Daniel Sakyi
The purpose of this paper is to examine macroeconomic determinants of interest rate spreads in Ghana for the period 1980-2013.
Abstract
Purpose
The purpose of this paper is to examine macroeconomic determinants of interest rate spreads in Ghana for the period 1980-2013.
Design/methodology/approach
The autoregressive distributed lag bounds test approach to cointegration and the error correction model were used for the estimation.
Findings
The results indicate that exchange rate volatility, fiscal deficit, economic growth, and public sector borrowing from commercial banks, increase interest rate spreads in Ghana in both the long and short run. Institutional quality reduces interest rate spreads in the long run while lending interest rate volatility and monetary policy rate reduce interest rate spreads in the short run.
Research limitations/implications
The depreciation of the Ghana cedi must be controlled since its volatility increases spreads. There is a need for fiscal discipline since fiscal deficits increase interest rate spreads. Government must reduce its domestic borrowing because the associated crowding-out effect increases interest rate spreads. The central bank must improve its monitoring and regulation of the financial sector in order to reduce spreads.
Originality/value
The main novelty of the paper (compared to other studies on Ghana) lies on the one hand; analysing macroeconomic determinants of interest rate spreads and, on the other hand, controlling for the impact of institutional quality on interest rate spreads in Ghana.
Details
Keywords
Anastasios Evgenidis and Costas Siriopoulos
For over two decades numerous studies have provided evidence on the predictive ability of the yield spread for real economic growth. While all this large literature has focussed…
Abstract
Purpose
For over two decades numerous studies have provided evidence on the predictive ability of the yield spread for real economic growth. While all this large literature has focussed on how well the spread helps predict real activity, none of these has given an answer on why the spread predicts. The purpose of this paper is to deal with this issue by trying to find an answer on the reason and the economic conditions under which the spread proves to be so powerful predictor of economic activity.
Design/methodology/approach
The authors examine whether the explanation of spread’s predictive ability lies behind interest rate volatility supposing that the economy oscillates between high- and low-volatility regimes. For this reason the authors nest GARCH models into Markov regime switching models.
Findings
When the authors assume that the economy simply oscillates between different regimes, interest rate volatility does not explain the spread’s predictive ability. However, the authors obtain a very interesting result when the authors augment the conditional variance with a level effects term. This ensures that in an environment with high levels of interest rates – in which the rational agents expect the economy to slow down – there is a greater possibility for the economy to switch to a high-volatility regime. Under these economic conditions, interest rate volatility appears to be the reason of spread’s predictive power from one up to three years.
Originality/value
This study contributes to the relevant literature by providing an explanation on the reason and the economic conditions under which the spread proves to be so powerful predictor of economic activity.
Details
Keywords
The purpose of this paper is to examine how policy instability is priced in interest rates. Policy instability refers to the likelihood that the current policy will be changed in…
Abstract
Purpose
The purpose of this paper is to examine how policy instability is priced in interest rates. Policy instability refers to the likelihood that the current policy will be changed in the future in the absence of political power shifts.
Design/methodology/approach
Chinese government’s experimental policy-making approach provides an ideal set of frequent policy flip-flops which allows us to identify the effect of policy changes.
Findings
Conditional on the bureaucratic quality of policymaking, a good-quality policy reversal is related to reductions in interest rate term spread and volatility; a bad-quality policy reversal is related to increases in the spread and volatility. The bureaucratic quality is multi-dimensional and the moderating effect is stronger on interest rates when it is measured more precisely.
Originality/value
First, we can use the interest rate dynamics to infer the policy risk premium, which is a more objective market indicator of the bureaucratic quality of the policy change. Second, the study is among the first that documents the pricing of policy instability can be moderated by the bureaucratic quality. The results indicate that it is important for a government to be responsive and consistent in liberalizing the financial market. It will lead to reduced cost of capital and volatility for investors and firms in the economy. Third, given that the bureaucratic quality is multi-dimensional and produces stronger impact jointly, a country shall continue to improve on different aspects of the bureaucratic quality. Although the study is based on the empirical evidence from Chinese policy environment, the results can be broadly applied to any developing economies that intend to liberalize the market to spur economic growth.
Details
Keywords
This study aims to investigate the determinants of credit spreads in hotel loans securitized into commercial mortgage-backed securities (CMBS) between 2010 and 2015.
Abstract
Purpose
This study aims to investigate the determinants of credit spreads in hotel loans securitized into commercial mortgage-backed securities (CMBS) between 2010 and 2015.
Design/methodology/approach
The sample represents 1,579 US hotel fixed interest rate whole loans with an aggregate mortgage value of $26.6bn at loan origination. The relationship between credit spreads and property, loan and market characteristic is examined via multiple regression analysis. Additionally, the method of 2-stage least squares is used to control for endogeneity bias and identify the effect of the loan-to-value (LTV) ratio on credit spreads.
Findings
The multiple regression models explain 80 per cent of the variation in credit spreads and show a significant association of credit spreads with hotel and loan characteristics and market conditions. The findings indicate the debt coverage ratio to be the most important predictor of credit spreads followed by the loan maturity term, implied capitalization rate, LTV and yield curve. The results show the debt yield premium to be a stronger predictor of credit spreads than the debt yield ratio. The spread between the debt yield ratio and mortgage interest rate could be used in future research as an instrumental variable to identify the effect of the LTV on credit spreads.
Research limitations/implications
This study is limited to the CMBS market and the period after the financial crisis. Additional limitations include sample selection bias, exclusion of multi-property loans and variable interest rate loans.
Practical implications
Interest rate increases in an expanding economy would likely increase the cost of borrowing for hotel owners leading to higher debt service payments and lower profitability. If an increase in interest rates is offset by a decline in credit spreads, hotel owners will still benefit from the ensuing stability in borrowing interest rates. The evidence also suggests that CMBS lenders favor select service and extended stay hotels. Owners and operators of these efficient and profitable hotels will likely obtain loans with lower credit spreads given their lower risk of default.
Originality/value
The current study provides evidence on the effects of loan and property characteristics in the pricing of loan risk and serves to inform CMBS market participants about the factors that drive credit spreads in hotel mortgage loans.
Details
Keywords
If banks solve an inter-temporal problem under adverse selection and moral hazard, then bank specific factors, regulatory and supervisory features, market structure, and…
Abstract
If banks solve an inter-temporal problem under adverse selection and moral hazard, then bank specific factors, regulatory and supervisory features, market structure, and macroeconomic factors can be expected to affect banks’ loan interest rates and their spread over deposit interest rates. To examine interest rate pass-through for Indian banks in a period following extensive financial reform, after controlling for all these factors, we estimate the determinants of commercial banks’ loan pricing decisions, using the dynamic panel data methodology with annual data for a sample of 33 banks over the period 1996–2012. Results show commercial banks consider several factors apart from the policy rate. This limits policy pass-through. More competition reduces policy pass-through by decreasing the loan rate as well as spreads. If managerial efficiency is high then an increase in competition increases the policy pass-through and the vice-versa. Reform has had mixed effects, while managerial inefficiency raised rates and spreads, product diversification reduced both. Costs of deposits are passed on to loan rates. Regulatory requirements raise loan rates and spreads.
Details
Keywords
Hon-Lun Chung, Wai-Sum Chan and Jonathan A. Batten
The dynamics between five-year US Treasury bonds and interest rate swaps are examined using bivariate threshold autoregressive (BTAR) models to determine the drivers of spread…
Abstract
The dynamics between five-year US Treasury bonds and interest rate swaps are examined using bivariate threshold autoregressive (BTAR) models to determine the drivers of spread changes and the nature of the lead–lag relation between the two instruments. This model is able to identify the economic – or threshold – value that market participants consider significant before realigning their portfolios. Specifically, three different regimes are identified: when the swap spread in the previous week is either high or low, the Treasury bond market leads the swap market. However, when the swap spread is low, none of the markets leads each other. Thus, yield movements are shown to be governed by the direction and magnitude of the change in the swap spread, which in turn provides an economic insight into the rebalancing between swap and bond portfolios.
Salvador Cruz Rambaud and María de los Ángeles Del Pino Álvarez
The purpose of this paper is the analysis of the mortgage prices derived from the increase of defaults and the withdrawal of floor clauses in the mortgages offered by banking…
Abstract
Purpose
The purpose of this paper is the analysis of the mortgage prices derived from the increase of defaults and the withdrawal of floor clauses in the mortgages offered by banking institutions in Spain. More specifically, this manuscript focuses on the evolution of the spread applied to mortgages contracted with a variable interest rate.
Design/methodology/approach
Two models have been considered to make a proper estimation of the yield curve to assess the loss due to the withdrawal of the floor clauses and quantify the component of the price used to cover the interest rate risk. Two different scenarios have been considered to avoid an underestimation of the aforementioned valuation.
Findings
The authors have shown that the increase in the percentage of doubtful mortgages has led to an increase in the spread of adjustable-rate mortgages. Moreover, the authors have shown that around 40 per cent of spreads are used to cover the interest rate risk.
Originality/value
The main contribution of this manuscript is the quantification of the loss expected by lenders and its impact in the spread. Due to this fact, the loan spread can be disaggregated into a component dependent on the credit risk associated with the borrower, and another component dependent on the interest rate risk to which the lender is exposed.
Details
Keywords
Mariya Gubareva and Maria Rosa Borges
This chapter reassesses the economics of interest rate risk management in light of the global financial crisis by developing a derivative-based integrated treatment of interest…
Abstract
This chapter reassesses the economics of interest rate risk management in light of the global financial crisis by developing a derivative-based integrated treatment of interest rate and credit risk interrelation. The decade-long historical data on credit default swap spreads and interest rate swap rates are used as proxy measures for credit risk and interest rate risk, respectively. An elasticity of interest rate risk and credit risk, considered a function of the business cycle phases, maturity of instruments, economic sector, creditworthiness, and other macroeconomic parameters, is investigated for optimizing economic capital. This chapter sheds light on how financial institutions may address hedge strategies against downside risks implementing the proposed derivative-based integrated treatment of interest rate and credit risk assessment allowing for optimization of interest rate swap contracts. The developed framework of integrated interest rate and credit risk management is of special importance for emerging markets heavily dependent on foreign capital as it potentially allows emerging market banks to improve risk management practices in terms of capital adequacy and Basel III rules. Analyzing diversification versus compounding effects, it allows enhancing financial stability through jointly optimizing Pillar 1 and Pillar 2 economic capital.
Details
Keywords
Gabriel Caldas Montes and Vítor Manuel Araújo da Fonseca
Using a fiscal sentiment indicator, this study aims to verify whether fiscal sentiment affects the yield curve in Brazil. Since policymakers highlight the coordination between…
Abstract
Purpose
Using a fiscal sentiment indicator, this study aims to verify whether fiscal sentiment affects the yield curve in Brazil. Since policymakers highlight the coordination between monetary and fiscal policies and the importance of fiscal policy to the expectations formation process in inflation targeting regimes, the authors also explore the transmission mechanism through inflation expectations. Hence, the study also analyzes the effect of fiscal sentiment on interest rate swap spreads through the inflation expectations channel.
Design/methodology/approach
Based on information obtained from official communiqués about fiscal policies issued by the Central Bank of Brazil and the Brazilian Ministry of Finance, the study builds a fiscal sentiment indicator. The econometric strategy to verify whether fiscal sentiment is related to the short tail of the yield curve is based on time series analysis through ordinary least squares and generalized method of moments estimates. In turn, to estimate the transmission mechanism through inflation expectations, the model uses interaction terms between fiscal sentiment and inflation expectations.
Findings
The results suggest a more optimistic (pessimistic) fiscal sentiment reduces (increases) swap spreads. The findings reveal that improvements in fiscal credibility and a more optimistic fiscal sentiment are able to reduce the positive marginal effect that inflation expectations variations have on interest rate swap spreads.
Originality/value
This study contributes to the literature, as, to the best of authors’ knowledge, it is the first to analyze the content of the communiqués related to fiscal policy, and based on this content, it extracts the sentiment related to the fiscal environment and analyzes the effect of this sentiment on the yield curve. Besides, different from existing studies that analyze the effect of fiscal backward-looking aspects (such as public debt, budget balance, taxes and public spending) on the yield curve, this study investigates forward-looking aspects related to fiscal policy (such as fiscal credibility and fiscal sentiment).
Details