Financial Integration Through Benchmarks: The European Banking Sector
AbstractEuropean banking regulation has been harmonized to a high degree over the last few decades. Nevertheless, the European banking industry remains fragmented as shown by the relatively high market shares of banks in their home countries. In this paper we concentrate on the integration process of European bank share prices. We develop a parsimonious model that is able to detect different integration (correlation) regimes. The model is applied to a set of 41 European banks that have a continuous share price listing over the period January 1990 â€“ March 2003. Our main finding is that the correlation between larger banks in Europe has increased substantially over this period, whereas the correlation between smaller banks has become lower. A reason for this result could be that investors perceive that the activities of bigger banks get more integrated. Another reason may be that as a result of institutional and other larger investors turning their investment strategies towards a European sector-based approach, investors are tracking indices of the European banking sector. These indices are typically constructed from the stock prices of the larger banks. This would create an incentive for large banks to become more integrated with other large banks.
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Bibliographic InfoPaper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2004-110-F&A.
Date of creation: 22 Dec 2004
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European banks; regime-switching; bank integration; bank risk; equity market integration;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-01-02 (All new papers)
- NEP-EEC-2005-01-02 (European Economics)
- NEP-EEC-2005-01-05 (European Economics)
- NEP-FIN-2005-01-02 (Finance)
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- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
- Gianni De NicolÃ³ & Myron L. Kwast, 2002. "Systemic Risk and Financial Consolidation: Are they Related?," IMF Working Papers 02/55, International Monetary Fund.
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- Dahl, Drew & Shrieves, Ronald E. & Spivey, Michael F., 2008. "Convergence in the activities of European banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(2), pages 161-175, April.
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