Bank competition and interest rate pass-through in the BRICS

Abstract

Purpose

The purpose of this paper is to examine and compare the interest rate pass-through among the Brazil, Russia, India, China and South Africa (BRICS) emerging markets.

Design/methodology/approach

The paper reviews a general literature on interest rates pass-through by applying a cointegration and asymmetric mean adjustment lag (MAL) error correction methodology (ECM).

Findings

A symmetric adjustment is found in Russia, China and South Africa's deposit rate, while an asymmetric adjustment is found in Brazil and India's deposit rate adjustments. The presence of a customer reaction theory is found in Brazil, India, China and South Africa's deposit rate adjustments, while a collusive pricing arrangement is found in Russia. From the lending rate adjustment, a collusive pricing arrangement was found in Brazil, China and South Africa, while a customer reaction theory was found in India and Russia.

Research limitations/implications

The sample period used in the study covers a period starting from the formal recognition of BRIC (2001-2010), which limits the data length.

Practical implications

The research output and implication can assist monetary policy makers, investors and consumers to monitor BRICS’ central banking, commercial banking and competition behaviour, individually and as a group. The BRICS are potentially heading towards a more financially integrated bloc as multilateral agreements among members increases. This is in the form of Letters of Credit and Memorandum of Understanding. These agreements should boost intra-BRICS financial transactions, investments and trade.

Originality/value

This is, to the best of knowledge, the first analysis of BRICS interest rate pass-through using the asymmetric MAL ECM application.

Citation

Fadiran, G. (2014), "Bank competition and interest rate pass-through in the BRICS", International Journal of Emerging Markets, Vol. 9 No. 4, pp. 471-487. https://doi.org/10.1108/IJoEM-05-2011-0046