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Bank Rates and the Yield Curve : A Study on the Relationship Between Banks' Deposit and Lending Rates to Treasury Yield Rates

by Dalteg, Tomas

Abstract (Summary)
The purpose of this thesis is to investigate how well Swedish banks’ follow the interest rate development of Swedish Treasury Bills and Swedish Government Bonds when they are determining the levels for their deposit and lending rates. Individuals’ deposits in a bank serves as one of the banks main assets in the balance sheet, and the spread between the bank’s deposit rate and the short-term market rate is a large source of funding for the bank. If there is a strong relationship of this spread over time, one may assume that this spread is of great importance for financing of the banking firm.The spread between the bank’s lending rate and the long-term market rate – credit risk spread – also serves a large source of interest income for the bank, and if this relationship is strong over time, one may assume that this spread is of great importance for financing of the banking firm as well.The banks subjected for investigation in this paper are Handelsbanken (SHB) and Föreningssparbanken (FSB). This paper finds a weaker relationship between the banks’ deposit rates and the short-term market rates, than for the lending rates and the long-term market rates. This indicates that the credit risk spread is of greater importance for financing of the banking firm than the funding spread. The weaker relationship between the banks’ deposit rates and the short-term market rate may be due to the great variability of savings alternatives offered in the market place today. The fact that banks today have deposit-deficit may also explain the weaker relationship, which may be explained by the Baumol-Tobin transaction model – where the higher the interest rate, the greater amount is being kept in the account. The stronger relationship between the banks’ lending rate and the long-term market rate may be due to the nature of the credit risk spread to function as a price-discrimination tool between lending clients.
Bibliographical Information:

Advisor:

School:Högskolan i Jönköping

School Location:Sweden

Source Type:Master's Thesis

Keywords:yield curve bank rates financing funding spread credit risk

ISBN:

Date of Publication:09/13/2005

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