Using Deposit Interest Rates in Setting Loan Interest Rates : Evidence from Turkey

Bank credit margins are set by two dynamics: Loan interest rates and deposit interest rates. The latter is the leading funding cost for the commercial banks. Sampling the period running from the last financial quarter of 2002 to the last financial quarter of 2009, we consider all the listed commercial banks operating in Turkey. We obtain strong evidence of one-way causality between loan interest rates and deposit interest rates. In setting their loan interest rates, banks use deposit interest rates of the preceding period. The reverse is not true. Concurring with the literature, this causation implies that deposit interest rates explain the changes in the margin