engleski

The Cost of Funds and Pricing Loans of Croatian Banks: Evidence from a Vector Error Correction Model

Accepting deposits and granting loans are the most important banking operations in which usual sources of funds are consisted of deposits and nondeposit liabilities. For pricing loans banks use various methods whereby the simplest method is based on the cost of funds which takes into account the cost of borrowing funds, operational and administrative costs, risks and profit margins. Therefore, to be profitable, banks revenues should be greater than their costs. It should be borne in mind that the cost of loans should be equal to marginal cost of borrowing funds, so when perfect competition and complete information are present, the increase in marginal costs will be fully transferred on their customers i.e. borrowers in the form of rising cost of loans. In other cases, the increase in costs of borrowed funds will be transferred to borrowers to a greater or lesser amount than the amount of the increase itself. The aim of this paper is to empirically determine the amount by which changes in the cost of borrowing funds of Croatian banks are transferred to their customers in the form of changes in the cost of loans. Interest rate on deposits is taken as the cost of borrowing funds while interest rate on loans presents the income. This study applies a time series analysis, i.e. a vector error correction model (VECM).

banks; the cost of funds; pricing loans; VECM; Croatia

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