The Behaviors of Lending, Deposit Rates and Intermediation Premium of Pakistani Banks with Different Types of Ownership Structures

Chu V. Nguyen, Muhammad Mahboob Ali, Alexandru Mircea Nedelea


This study applies Enders and Siklos’ (2001) procedure to test for the long-run asymmetric co-integrating relationship and short-run dynamic Granger causality between Pakistani lending and deposit rates set by public, private, foreign, specialized, and all banks combined over the period January 2004 to December 2013. Terrorist activities on the money market plays negative role. The empirical results suggest a long-run asymmetric co-integration relationship between the rates. The Granger causality tests suggest bidirectional and asymmetric causality between lending and deposit rates set by Pakistani public and private banks, while the lending rates set by the country’s foreign, specialized and all banks combined are exogenous from their deposit rates.  The unusually fast and overshot adjustments of the lending rates in response to increases in the intermediation premium of public banks are interpreted as graft maximization.  The asymmetric and different nature of the Granger causalities exhibited by banks with different ownership structures should be of special interest for the Central Bank in formulating and implementing its countercyclical monetary policy and for corporations in determining their capital structures.


Asymmetry, co-integration, lending rate, deposit rate, intermediation premium, TAR Model, Pakistan


Arak, M., S. Englander, and E. Tang (1983), “Credit Cycles and the Pricing of the Prime Rate”, Federal Reserve Bank of New York Quarterly Review, 12-18.

Burki, A. A. and S. Ahmad (2011), “The Impact of Bank Governance on Bank Performance in Pakistan”, the Lahore Journal of Economics 16: SE (September 2011), pp. 271-300.

Chan, K.S. (1993), “Consistency and Limiting Distribution of the Least Squares Estimator of a Threshold Autoregressive Model.” Annals of Statistics, 21(2), 520-533.

Cook, T. and T. Hahn (1989), “The Effect of Changes in the Federal Funds Rate Target on Market Interest Rates in the 1970s”, Journal of Monetary Economics, 24, 331-351.

Dueker, M.J. (2000), “Are Prime Rate Changes Asymmetric?”, Federal Reserve Bank of St. Louis Economic Review, September/October, 33-40.

Diebold, F.X. and S.A. Sharpe (1990), “Post-Deregulation Bank Deposit Rate Pricing: The Multivariate Dynamics”, Journal of Business & Economic Statistics, 8(3), 281-291.

Enders, W. (2001), “Improved Critical Values for Enders and Granger Unit Root Test”, Applied Economic Letters, 8(4), 257-261.

Enders, W. and P.L. Siklos (2001), “Contegration and Threshold Adjustment”, Journal of Business and Economic Statistics, 19(2), 166-176

Enders, W. and C.W.J. Granger (1998),“Unit Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates”, Journal of Business and Economic Statistics, 16(3), 304-311.

Enders, W. and P. Siklos (2001), “Cointegration and Threshold Adjustment”, Journal of Business & Economic Statistics, 19(2), 304-311.

Engle, R.F., D.F. Hendry, and J.F. Richard (1983), “Exogeneity”, Econometrica, 51(2), 277-304.

Ewing, B. T., S. M., Hammoudeh, and M. A. Thompson (2006), “Examining Asymmetric Behavior in US Petroleum Futures and Spot Prices”, Energy Journal, 27(3), 9-23.

Forbes, S.M. and L.S. Mayne (1989), “A Friction Model of the Prime”, Journal of Banking and Finance, 13, 127-135.

Frost, D. and R. Bowden (1999), “An Asymmetry Generator for Error-Correction Mechanisms with Application to Bank Mortgage-Rate Dynamics”, Journal of Business & Economic Statistics, 17(2), 253-263.

Goldberger, M.A. (1984), “The Sensitivity of the Prime Rate to Money Market Conditions”, Journal of Financial Research, 7(4), 269-280.

Hannan, T.H. and A.N. Berger (1991), “The Rigidity of Prices: Evidence from the Banking Industry”, American Economic Review, 81(4), 938-945.

Heffernan, S.A. (1997), “Modelling British Interest Rate Adjustment: An Error Correction Approach”, Economica, 64, 211-231.

Hofmann, B. and P. Mizen (2004), “Interest Rate Pass-Through and Monetary Transmission: Evidence from Individual Financial Institutions’ Retail Rates”, Economica, 71, 99-123.

Levine, P. and P.D. Loeb (1989), “Asymmetric Behavior of the Prime Rate of Interest”, American Economist, 33, 34-38.

Mester, L.J. and A. Saunders (1995), “When Does the Prime Rate Change?” Journal of Banking and Finance, 19, 743-764.

Moazzami, B. (1999), “Lending Rate Stickiness and Monetary Transmission Mechanism: The Case of Canada and the United States”, Applied Financial Economics, 9, 533-538.

Neumark, D. and S. Sharpe, (1992), “Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits”, Quarterly Journal of Economics, 107(2), 657-680.

Nguyen, C.V., L. V. Pointer and C. A. Smith, (2008), “The Asymmetric Behavior of the Mexican Banking Interest Rate Margin”, Journal of Business and Economics Perspectives, Vol. 34(2), Fall/Winter 2008, pp. 57-67.

Nguyen, Chu V. and A. M. Islam (2010) “Asymmetries in the Thai Lending-Deposit Rate Spread: An Econometric Analysis”, Applied Economic Letters, 17(13), pp. 1229-1236.

Nguyen, Chu V. , A. M. Islam and Muhammad Mahboob Ali (2012) “Bangladeshi monetary policy transmission mechanism: asymmetric responses, inflation, and policy time lags”, Savings and Development, Vol. 36(2012), No. 1

Nguyen, Chu V., C. A. Smith and R. Verma, (2013), “Colombian Lending, Deposit Rates and their Spread: A Cointegration Analysis”, the Journal of Global Business Issues, Vol. 7(1), pp. 7-15.

Petrucelli, J. and S. Woolford (1984), “A Threshold AR(1) Model.” Journal of Applied Probability, 21, 473-481.

Sarno, L. and D. L. Thornton (2003), “The Dynamic Relationship Between the Federal Funds Rate and the Treasury Bill Rate: An Empirical Investigation,” Journal of Banking and Finance, 27, 1079-1110.

Thompson, M.A. (2006). “Asymmetric Adjustment in the Prime Lending-Deposit Rate Spread.” Review of Financial Economics, 15(4), 323-329.

Tkacz, G. (2001), “Endogenous Thresholds and Tests of Asymmetry in U.S. Prime Rate Movements”, Economic Letters, 73, 207-211

Full Text: PDF

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.