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An empirical analysis of national differences in the retail bank interest rates of the euro area

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  • Massimiliano Affinito

    ()
    (Banca d'Italia)

  • Fabio Farabullini

    ()
    (Banca d'Italia)

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    Abstract

    The availability of new harmonized data on bank interest rates allows a rigorous assessment to be made of cross-country price homogeneity/heterogeneity in euro area retail credit markets. Econometric analysis shows that the banking market is still highly segmented and that the degree of integration in a single country (Italy, taken as a benchmark for integration) is greater than in the euro area. However, national differences can be partially explained by variables reflecting the characteristics of domestic depositors and borrowers (“demand side” regressors, such as risk exposure, disposable income, alternative financing sources, average firm size) and the characteristics of the banking systems (“supply side” regressors, such as banking market concentration, asset and liability structure). The euro area prices appear different because national banking products appear different or because they are differentiated by national factors. Once these factors have been controlled for, many differences disappear.

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    Bibliographic Info

    Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 589.

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    Date of creation: May 2006
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    Handle: RePEc:bdi:wptemi:td_589_06

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    Keywords: bank interest rates; convergence; integration;

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    Cited by:
    1. Vajanne, Laura, 2007. "Integration in euro area retail banking markets – convergence of credit interest rates," Research Discussion Papers 27/2007, Bank of Finland.
    2. Schalck, Christophe, 2006. "Coordination des Politiques Budgétaires dans une Union Monétaires Hétérogène: Modélisation et Application à l'UEM Coordination of Budgetary Policies in a Heterogeneous Monetary Union: Modelisat," MPRA Paper 1435, University Library of Munich, Germany.
    3. Marotta, Giuseppe, 2009. "Structural breaks in the lending interest rate pass-through and the euro," Economic Modelling, Elsevier, vol. 26(1), pages 191-205, January.
    4. Kok, Christoffer & Lichtenberger, Jung-Duk, 2007. "Mortgage interest rate dispersion in the euro area," Working Paper Series 0733, European Central Bank.

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