Chapter 4 Research design & data
4.3 Data
4.3.2 Dependent variable: the spread
The way of measuring the dependent variable spread is based upon the research of Carbo- Valverde and Rodriguez-Fernandez (2007). They use among other things the βloan to market rate spreadβ as a proxy for bank margins. Because their research focusses on loans in general, instead of mortgages, they take loan interest rates and subtract these by three-months interbank rates. (Carbo-Valverde & Rodriquez-Fernandez, 2007: 2048) In this research the same proxy is used, but instead of taking the three-months interbank interest rate I choose to take the 12- months interbank rate. More specifically the EU interbank rate, Euribor, will be used.
The Euro Interbank Offered Rate (Euribor) is based upon the average interest rates at which banks within the Eurozone lend to each other14. In this way the Euribor interest rate can be seen as a reference for the purchase price banks have to pay for loans. This implies that the difference between average mortgage interest rates and the Euribor rate gives an idea of efficiency, and whether or not there is a possibility to achieve high profit.
The variable spread is calculated by subtracting the Euribor rates from the mortgage interest rates. Because both Euribor rates and mortgage interest rates are expressed in percentages, the spread will show the difference in percentage points.
ππππππ = ππππ πππ‘ππππ π‘ πππ‘ππ ππ πππππ π‘π βππ’π πβππππ πππ βππ’π π ππ’ππβππ π π€ππ‘β π πππππ‘πππ πππ‘π πππ ππ πΌπ πΉ ππππππ ππ π’π π‘π πππ π¦πππ(πππ€ ππ’π ππππ π )
β πΈπ’πππππ πππ‘ππππ π‘ πππ‘ππ Equation 4: Calculation of the spread
14 Oxford Living Dictionary, Definition of EURIBOR in English, https://en.oxforddictionaries.com/definition/euribor
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Figure 2: Loan to market rate spread, per country per year
Notable in this figure is the decline in spreads between 2003 and 2008, and the occurrence of a jump in 2009, probably caused by the financial crisis. From 2008 on there seems to be an increasing trend in banking spreads. For some countries this increase is more linear, while for other countries it is more fluctuating.
4.3.2.2 The interest rate on mortgage credit
In order to calculate the dependent variable spread, data on the interest rates of mortgage credit is necessary. Mortgage interest rates are monitored by the European Central Bank. In their βStatistical Data Warehouseβ the subject βMortgage loan features/credit standardsβ can be found. There one can download data on:
ο§ βBank interest rates on loans to households for house purchase with a floating rate and an IRF period of up to one year (new business)β
ο§ βBank interest rates on loans to households for house purchase with an original maturity of up to one year (outstanding amounts)β
ο§ βBank interest rates on loans to households for house purchase with an original maturity of over five years (outstanding amounts)β
ο§ βBank interest rates on loans to households for house purchase with an IRF period of over ten years (new business)β
This concerns annual data, from the year 2000 up until august 2017, per Eurozone country. For this research the choice is made to use the variable: Bank interest rates on βloans to households for house purchase with a floating rate and an IRF period of up to one year (new business)β. Data can be found on sdw.ecb.europa.eu15.
The new business variables show the interest rates for newly concluded mortgages, while the outstanding amount variables show the interest rates on amounts that are owed to the credit
15 Data on mortgage interest rates:
https://sdw.ecb.europa.eu/browseTable.do?legendPub=published&node=9689358&df=true&DATASET=0&lege ndRef=reference&start=&end=&trans=AF&q=&type=&submitOptions.x=0&submitOptions.y=0
39 institution (not yet paid). The choice was made to use the new business variable because I expect the values on this variable to be more responsive to changes in the values of the independent variables then the outstanding amounts variable. The choice for using new business variables does not exclude the fourth variable. The choice to use the first variable and not the fourth is motivated by the availability of data.
Data on βbank interest rates on loans to households for house purchase with a floating rate and an IRF period of up to one year (new business)β was unavailable for Belgium over the years 2003, 2004 and 2005. Unfortunately no suitable data to fill these gaps could be found. Because the values on mortgage interest rates are part of the calculation of the dependent variable, the spread, filling the blanks with averages of all other countries, or any other form of guessing, would not have been right. Because regression analysis is impossible when either values on the dependent or independent variable are missing, the observations 2003-2005 for Belgium are dropped from the dataset. Therefore this thesisβs dataset exists of 184 observations.
4.3.2.3 The Euribor
The Euribor interest rate can be seen as a reference for the purchase price banks have to pay for loans, and is also part of this researchβs calculation of the dependent variable spread. The values of the 12-month Euribor interest rate can be found on global-rates.com16.
When consulting the historical data, data from 1999 on can be found. One of the columns shows the average 12-month Euribor rate per year, these are the values of interest. Because the Euribor is the average interbank rate for the whole Eurozone the yearly data is the same for all Eurozone- countries.
The website where I derived the data reports the European Money Markets Institute as its source, which is the institute that monitors both the Euribor and the Eonia (effective overnight interest rate). The averages I use, the averages the global-rates website presents, are based upon daily Euribor rates. This is checked by deriving historical daily interest rates from the EMMI website17.