An Empirical Study on the Factors Affecting Savings Bank Loan Interest Rates

Abstract

The study analyzed reciprocal effects of base rate of the central bank, CD, CP, interest rates for bank deposits, bank loan interest, interest rate for savings bank deposits and savings bank loan interest. In particular, the study attempted to find an interest rate which affects interest rates of savings banks. If these variables affected interest rate decisions by savings banks, it would be possible to predict that movements of these variables in the future may affect changes of interest rates as well. In the impulse reaction function, CD rate and CP rate took the highest impact to the savings bank’s deposit interest and loan rate. In forecast error variance decomposition analysis, it was fond that the deposit interest and loan rate of the savings bank reciprocally affected each other. Then, CD rate and CP rate had the highest explanation power. Consequently, factors that affect the savings’ bank’s decision on interest rates were a bank’s deposit interest, CP and RP interest rate and RP rate which is the benchmark interest rate. The important point is that RP rate as the benchmark interest rate takes an important role because it becomes the base for influenced variables.