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What drove the rise in bank lending rates in Lithuania during the low-rate era?

Author

Listed:
  • Jaunius Karmelavičius

    (Financial Stability Department, Bank of Lithuania, Vilnius, Lithuania)

  • Ieva Mikaliūnaitė-Jouvanceau

    (Financial Stability Department, Bank of Lithuania, Vilnius, Lithuania)

  • Andrius Buteikis

    (Financial Stability Department, Bank of Lithuania, Vilnius, Lithuania)

Abstract

While Euro area interest rates were responding to accommodative monetary policy and decreasing throughout 2015-2019, in stark contrast, Lithuania's bank lending rates increased. Although the rates dropped slightly around the onset of the pandemic, they are still elevated and well above the EA figures. This paper asks the question: what were the drivers of such interest rate dynamics in Lithuania? By analysing the historical events and practical aspects of loan pricing in Lithuania's banking industry, we build an empirical model that exploits lending rate variation across banks, time and lending segments, and maps it to different drivers of pricing. We find that the recent changes in lending rates can be attributed to average bank margins, which moved largely in response to changes in market concentration.

Suggested Citation

  • Jaunius Karmelavičius & Ieva Mikaliūnaitė-Jouvanceau & Andrius Buteikis, 2023. "What drove the rise in bank lending rates in Lithuania during the low-rate era?," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 23(2), pages 162-199.
    • Handle: RePEc:bic:journl:v:23:y:2023:i:2:p:162-199
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    File URL: https://www.tandfonline.com/doi/epdf/10.1080/1406099X.2023.2260587
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    More about this item

    Keywords

    Interest rates; loan pricing; banking; concentration; capital requirements;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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