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Asymmetric changes in Australia’s small business loan rate

Abstract

This paper examines the dynamic asymmetric relationship between changes in the Reserve Bank of Australia’s (RBA) cash rate and the interest rate for small business loans using monthly data (1990–2011). The results provide support for the rockets-and-feathers hypothesis with respect to both the amount and adjustment asymmetries. While the RBA’s rate rises exert a one-to-one and instantaneous impact on the loan rate, its rate cuts are only slowly and partially passed onto small businesses with a delay of 1–2 months. The results also suggest that the recent global financial crisis increased the cost of borrowing for small businesses in Australia by 2.21 %. These findings indicate that small businesses have limited time to respond to interest rate rises and not provided with the full benefit of interest rate decreases. Addressing this problem should ease the interest rate burden for small businesses and enhance their contribution to the economy.

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Fig. 1

Notes

  1. 1.

    The cash rate is one of the major factors influencing lenders’ behaviour in the domestic money market. The response of individual lenders to changes in their funding cost is also affected by other factors including the extent of securitisation and lenders’ exposure to external funding sources.

  2. 2.

    For example, a consistent value of the threshold parameter can be found by undertaking a grid search by first sorting the sequence \(\hat{e}_{t}\) (or in the case of the M-TAR model \(\varDelta \hat{e}_{t}\) sequence) in an ascending order. To have enough observations in each regime, one can conduct a grid search within the middle say 80–85 % of the observations and whatever value of the threshold yielding the lowest residual sum of squares can be considered as a consistent estimate of the threshold.

  3. 3.

    Using the data on the interest margin in the banking sectors of five European countries (i.e. Germany, France, the UK, Italy and Spain) during the period 1993–2000, Maudos and Fernandez de Guevara (2004, p. 2277) found that “the ‘pure’ interest margin depends on the competitive conditions of the market, the interest rate risk, the credit risk, the average operating expenses and the risk aversion of banking firms, as well as … opportunity cost of reserves, payment of implicit interest and quality of management”.

  4. 4.

    Brokers must disclose on what base they receive their commissions from various financial institutions up front.

  5. 5.

    http://www.canstar.com.au/business-loans/term-loan-commercially-secured/.

  6. 6.

    http://www.canstar.com.au/business-loans/term-loan-residentially-secured/.

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Acknowledgments

We wish to thank Professor László Szerb, the Associate Editor, and two anonymous referees, whose invaluable inputs and comments considerably improved an earlier version of this article. The usual caveat applies.

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Correspondence to Abbas Valadkhani.

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Valadkhani, A., Chen, G. & Kotey, B. Asymmetric changes in Australia’s small business loan rate. Small Bus Econ 43, 945–957 (2014). https://doi.org/10.1007/s11187-014-9579-z

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Keywords

  • Asymmetric behaviour
  • Small businesses
  • Bank lending
  • Australia

JEL Classifications

  • E43
  • E58
  • L26