The banking sector of the financial system plays an important role in an economy in transmitting the central bank’s monetary policy stance. This thesis presents three papers that examine the importance of the IRPT mechanism, the validity of The Law of One Price and investigates the determinants of the interest rate margins. First study uses a large sample of aggregated data to shed light on how bank retail rates for deposit, lending and mortgage products respond to changes inpolicy rates. The main goal of the study is to analyse the dynamic adjustment of UK bank and building society interest rates in response to policy rate changes. The study finds a very slow adjustment speed pre-crisis for both deposit and lending products but marginally complete for mortgage products, and it is heterogeneous across products. Long run pass through is incomplete for most products. Post-crisis, short sun adjustment Speed on all lending, mortgage and deposit products increases significantly. Average short run adjustment speed on deposit products is higher than on lending products. Second paper investigates the stickiness of interest rate pass-through, level of competition, and the Law of One Price for three types of Financial Institutions (Highstreet banks, building societies and Small banks) offering the same instant access savings and mid tier savings products. The average short run adjustment speed for the industry as a whole shows sluggish and sticky behaviour for low tier, mid tier and high tier instant access savings and mid tier savings accounts. The results verify that that price setting behaviour in the UK banking industry is not only sticky but also that inter-bank and intra-bank heterogeneities exist in the short-and long-run variables. Results show that heterogeneities for short run adjustment speednot only exist within different types of firm offering the same products, but also within the same firm offering different products.
Third paper investigates the determinants of lending margins for products for the five EU countries least affected and 4 EU countries most effected by the financial crisis, pre and post-crisis. Focusing on bank structural factors, country level bank-specific characteristics, macroeconomicand monetaryfactors, the study considers whether there are differences in the determinants of lending margins before and after the crisis period. Study finds evidencethat the lending margins have changed considerablypost-crisis; unconventional monetary policy has been successful in kick starting the financial system; and the pass-through has improved in least affected countriespost-crisis.