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Integration in euro area retail banking markets – convergence of credit interest rates

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  • Vajanne, Laura

    ()
    (Department of Financial Markets and Statistics)

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    Abstract

    Since the introduction of the single currency in 1999, major progress has been made towards achieving an integrated European capital and financial market. Available evidence suggests, nevertheless, that the degree of integration varies greatly depending on market segment. Retail banking markets are generally seen to be much less integrated than other segments of financial markets. Most consumers still buy retail financial services from domestic suppliers, cross-border entry of financial services firms is rare – even if it is growing – and the range of products available or terms attached thereto differ substantially across euro area countries. The purpose of this paper is to assess integration of retail banking in the euro area from January 2003 to December 2006. The empirical analysis is based on a monthly panel of recently published harmonised interest rates from euro area monetary financial institutions. We estimate two commonly used measures of convergence, namely â- and ó-convergence, to assess the speed and degree of integration. Tests for convergence are based on a panel unit root test. The tests provide evidence of a process of convergence in retail banking credit interest rates for households and non-financial corporations and show this convergence has recently being continuing. Thus, even if there are substantial cross-country differences in interest rate levels, progress towards integration is observable.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0727netti.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 27/2007.

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    Length: 29 pages
    Date of creation: 22 Dec 2007
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2007_027

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    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Keywords: financial market integration; euro area interest rates; panel data estimation;

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    1. Goldberg, Pinelopi K. & Verboven, Frank, 2005. "Market integration and convergence to the Law of One Price: evidence from the European car market," Journal of International Economics, Elsevier, vol. 65(1), pages 49-73, January.
    2. Claude Lopez, 2005. "A Panel Unit Root Test with Good Power in Small Samples," University of Cincinnati, Economics Working Papers Series 2005-01, University of Cincinnati, Department of Economics, revised 2007.
    3. Claude Lopez, 2003. "An Improved Panel Unit Root Test Using GLS-Detrending," Econometrics 0310003, EconWPA.
    4. Lieven Baele & Annalisa Ferrando & Peter Hördahl & Elizaveta Krylova & Cyril Monnet, 2004. "Measuring financial integration in the euro area," Occasional Paper Series 14, European Central Bank.
    5. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    6. Gropp, Reint & Kok, Christoffer & Lichtenberger, Jung-Duk, 2007. "The dynamics of bank spreads and financial structure," Working Paper Series 0714, European Central Bank.
    7. Claude Lopez & David H. Papell, 2003. "Convergence to Purchasing Power Parity at the Commencement of the Euro," University of Cincinnati, Economics Working Papers Series 2003-08, University of Cincinnati, Department of Economics.
    8. Quah, Danny T., 1996. "Empirics for economic growth and convergence," European Economic Review, Elsevier, vol. 40(6), pages 1353-1375, June.
    9. Massimiliano Affinito & Fabio Farabullini, 2006. "An empirical analysis of national differences in the retail bank interest rates of the euro area," Temi di discussione (Economic working papers) 589, Bank of Italy, Economic Research and International Relations Area.
    10. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
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    Cited by:
    1. Belke, Ansgar & Beckmann, Joscha & Verheyen, Florian, 2013. "Interest rate pass-through in the EMU – New evidence from nonlinear cointegration techniques for fully harmonized data," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 1-24.
    2. Rughoo, Aarti & Sarantis, Nicholas, 2014. "The global financial crisis and integration in European retail banking," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 28-41.
    3. David ARISTEI & Manuela Gallo, 2012. "Interest Rate Pass-Through in the Euro Area during the Financial Crisis: a Multivariate Regime-Switching Approach," Quaderni del Dipartimento di Economia, Finanza e Statistica 107/2012, Università di Perugia, Dipartimento Economia, Finanza e Statistica.
    4. Rughoo, Aarti & Sarantis, Nicholas, 2012. "Integration in European retail banking: Evidence from savings and lending rates to non-financial corporations," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1307-1327.

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