Factors Accounting for the Thai Intermediation Premium and Conditional Heterocedasticity

Abstract

Asymmetries in the Thai lending-deposit rate spread (intermediation premium) are documented. Empirical results revealed that the intermediation premium adjusts to the threshold faster when the deposit rates increase relative to the lending rates rather than when the deposit rates move in the opposite direction. Additionally, empirical findings indicate that Thai commercial banks exhibit predatory rate setting behaviour. These findings also show bidirectional Granger causality between the Thai lending rate and the deposit rate, indicating that the lending rate and the deposit rate affect each other’s movements. These results suggest that monetary authority can use its countercyclical monetary policy instruments to achieve macroeconomic objectives in the short run. However, the estimation results of the GARCH (2,2)-in-Mean model indicate that more frequent intervention by small policy measures is necessary to minimize the conditional variance of the intermediation premium in order to minimize the magnitude of the cycle of the lending rate.