How does the ECB interest rate affect the wholesale credit market?

[anon473]

I think that I have put this in the wrong forum but i am not certain how to move it.

I suppose I am asking this question because i dont really understand how the credit system works.
When the ECB changes its interest rate, why do the banks have to change theirs? Is it because the ECB is lending money to the banks at that rate? That makes some kind of sense to me however it does prompt the further question, i.e. how does this affect the credit market? Northern Rock's failed business model was reliant on credit from the market (I presume that this is rather than the bank of England). The wholesale credit market is presumably a free market (considering the laid back approach to regulation prevalent in most countries) so why would it pay any attention to the ECB or BoE. One possible analogy that i have is that the ECB is the tap and the banks are the holes in a seephose. the amount of water trickling out to the customers depends on the amount flowing through the hose (which is dependent on the ECB).
Does any of this make sense?
any help would be greatly appreciated

anon473

 

[NorfBank]

When the ECB changes its interest rate, why do the banks have to change theirs?

The banks don't have to change their rates in response to an ECB rate change unless the client is on a tracker rate product.
The reason they may bring rates down is really down to competition for business. If the competition lowers interest rates then other lenders follow suit.

The wholesale interbank lending rate (EURIBOR and LIBOR) is not reliant on what the ECB does. This is why during the credit crunch, mortgage lenders were crippled by tracker rates. The cost of money to fund the mortgages was going up (EURIBOR and LIBOR) while the repayments on a tracker mortgage were going down as tracker rates fell in line with the ECB. This is why the lenders pulled their tracker offerings.

Hope this makes sense.

 

[anon473]

it does make sense but it also throws up more questions!
Who is the ECB actually lending money to? Who is paying that headline interest rate? and what does the ECB actually do with the money it gets in?
The reason why i originally posted this in this forum was that i was wondering what happens to the ECBs income and outgoings when it decides to change interest rate. Does the ECB have less money to play with?

no closer to enlightenment
anon473