Determinants of the Pricing of Bank Loans: a Structural VAR Based Analysis

Abstract

In the last decade foreign currency indebtedness in Hungary has become a systemic financial problem, which also has a crippling impact on the real economy through its income and lending effects and has a significant constraining impact on economic policy. Besides the exchange rate the interest rate was also an important factor in determining the burden of households. Our research focuses on the causes and determinants of the pricing of Swiss franc denominated mortgage loans. In our consideration, basically four main price shocks affected the pricing of credit institutions: higher foreign currency rates and risk premia, deterioration of loan portfolio quality and the extra taxes imposed on banks. The question arises how these costs are related to the evolution of the interest rates and to what extent these cost shocks were passed on by banks to clients. Using a structural vector autoregressive model we found that the interest rates on housing loans were influenced by all of these cost shocks. Based on the findings of our empirical research, all four shocks had a profound impact on the interest rates on housing loans; in other words, bank sector cost shocks were indeed passed on to the interest rates applied by domestic banks.