During the recent tightening and easing cycle, the aggregate bank lending rate to firms in the euro area increased by less than the rise in policy and money market rates. This column uses granular credit registry data, revealing how changes in the composition and pricing of credit translate into aggregate rate developments and the gap. Composition effects were minor, while pricing effects were instrumental in opening the gap. The key factor was the development of banks’ fixed component of credit pricing. Changes in mark-ups partly counteracted the incomplete pass-through and thus reduced the gap.
As inflation surged from 2021 onward, central banks around the world tightened their monetary policy. In the euro area, policy and money market rates increased by up to 4.5 percentage points during the 2022-25 monetary policy tightening and easing cycle. When bank lending is key for the transmission process, like in the euro area, policymakers, bankers, and debtors closely watch how money market rates and bank lending rates co-move with policy rates. However, the bank lending rate to firms in the euro area did not increase in lockstep with policy and money market rates (Figure 1). It only increased by up to three percentage points. This opened a gap of 1.5 percentage points.
What explains the increase in the aggregate bank lending rate and the gap? This is what we address in our paper (Reimers and Michaelis 2025). These are important questions for central bankers, as they relate directly to the strength of monetary policy transmission via banks, for example to avoid an over-tightening of monetary policy. For banks and firms, these questions are highly relevant as well. They form expectations on how interest income and financing costs are likely to evolve and adjust their loan pricing and financing strategies accordingly.
Figure 1 The gap during the tightening and easing cycles, 2022-2025
Until recently, the lack of credit-level data did not allow investigating how micro-level developments shape the development of aggregate bank lending rates. This left open questions about the reasons for the incomplete pass-through (de Bondt et al. 2005, Belke et al. 2013, Holton and d’Acri 2018, Horvath et al. 2018), and consequently the opening of the gap. We add insights to this by using credit-level registry data (AnaCredit). Its granular nature allows us to identify micro-level dynamics lying behind the ‘veil of aggregate dynamics’ that shape macro patterns. More specifically, we decompose the gap into ‘composition’ and ‘pricing’ effects. Composition effects arise because ‘which banks’ financed ‘which firms’ and ‘in which way’ changed compared to 2021. Pricing effects are due to changes in how banks priced credit and firm characteristics during 2022-25. They arise from two factors: The extent to which banks passed through their higher refinancing costs, and adjustments that banks made to the discounts and premia they use to account for firm and credit characteristics.
To separate composition from pricing effects, we implement a decomposition technique that is standard in the labour literature. We show how to use it to decompose the development of aggregate variables over time and are the first to do so in the loan pricing literature.
Pricing effects are key to understanding why the gap opened
Composition effects were minor, while pricing effects were instrumental in opening the gap. Figure 2 makes this apparent via negative orange and blue bars. Combined, these bars sum up to explain the gap between the aggregate bank lending rate (dots) and the three-month (3M) Euribor (green bars). The blue bars indicate that the aggregate rate would have risen by up to 1.5 percentage points more if credit pricing had remained as in 2021. Similarly, the increase in the aggregate rate would have been up to 0.15 percentage points higher if the composition of lending had remained as in 2021 (orange bars).
Figure 2 The rise of the aggregate bank lending rate compared to 2021, pricing and composition effects
The gap was shaped by an incomplete pass-through of refinancing costs and adjustments in mark-ups, in particular higher costs for larger credit amounts and specific instruments.
The decomposition allows us to delve deeper, identifying individual contributors to the pricing effect. We find that banks adjusted their fixed components of credit pricing by less than the increase in the three-month Euribor, which was a key factor behind the opening of the gap (grey bars in Figure 3). According to the literature, banks adjust their fixed components of credit pricing to pass through changes in refinancing costs, but this pass-through tends to be incomplete (de Bondt et al. 2005, Belke et al. 2013, Holton and d’Acri 2018, Horvath et al. 2018). Therefore, the opening of a gap is not surprising. However, the lesson learnt here is that the transmission of monetary policy to bank lending rates involves more than a passing through of refinancing costs: Changes in mark-ups (i.e. in premia and discounts) were critical as well. For example, larger credit amounts and certain instrument types became more expensive compared to 2021. For credit amounts, the mechanism was as follows: Larger credit amounts typically come at a discount. But compared to 2021, this discount decreased during 2022-25. This exerted upward pressure on the aggregate rate amounting to as much as +1.3 percentage points. For instrument types, the pricing effect amounted to as much as +0.25 percentage points. Without adjustments in the premia and discounts, the gap would have been even larger (amounting to up to 2.25 percentage points, rather than 1.5 percentage points).
Figure 3 Individual contributors to the pricing effect
Conclusion
Overall, we show that monetary policy impulses were transmitted to bank lending rates differently depending on the type of firm and financing arrangement. Our micro-insights complement macro-based approaches to better understand how compositional shifts and pricing changes shape aggregate interest rate pass-through patterns. These adjustments may be strategic to tailor lending terms to different firms and financing profiles or to better manage risk and profitability. Understanding and anticipating these adjustments can help firms optimise their financing strategies, negotiate better terms, and align demand for and the supply of credit.
Our micro-based perspective on how individual determinants of bank lending rates shape pass-through patterns is also useful for monetary policy. So far, understanding of interest rate pass-through patterns has largely been derived from macro analyses. Their shortcoming, however, is that they conceal the influence of changes in the composition or pricing of individual determinants of bank lending rates on the pass-through. We show that there is more to the transmission of monetary policy via banks than just a passing through of changes in banks’ refinancing costs: The way banks price firm and credit characteristics when setting interest rates changes, too – and compensates for the incomplete pass-through of refinancing costs.
So far, the literature lacks comparable evidence on compositional shifts and pricing changes during other monetary policy tightening and easing phases. This hinders policymakers, bankers, and debtors in evaluating whether the compositional shifts and pricing changes that we document for 2022-25 were in line with broader historical patterns. We emphasise the importance of building historical evidence on the contributions of compositional shifts and pricing changes to the development of the aggregate bank lending rate and the gap. Such historical patterns would be very valuable, for example for policymakers when calibrating monetary policy and assessing the strength of monetary policy transmission.
Source : VOXeu
