The influence of sovereign bond yields on bank lending rates: the pass-through in Europe

In the wake of the recent crises, the question arose how to ensure the transmission of monetary policy to the lending rates for loans to private nonbanks, in particular against the background of divergent government bond yield changes. This paper investigates which variables help explain changes of long-term fixed-rate bank lending rates on loans to the private nonfinancial sector in 21 EU countries. We conduct a cross-country panel study and analyze vector error correction models for each country. We find that long-term sovereign bond yields have a significant positive and economically substantial impact on long-term lending rates in most euro area and some non-euro area countries. Our findings lend support to the view that unconventional monetary policy can influence long-term lending rates via its impact on government bond yields. Furthermore, our insights suggest adopting a cautious approach when designing changes to the regulatory treatment of sovereign exposures. To the extent that such changes cause a sustained widening of sovereign yield spreads, the impact on long-term lending rates could entrench real economic divergences between EU countries and in particular within the euro area.