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Diverse Degrees of Competition within the EMU and their Implications for Monetary Policy

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Author Info

  • Patrick Brämer

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Horst Gischer

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Toni Richter

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Mirko Weiß

    ()
    (German Savings Banks Association)

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    Abstract

    Our paper calls attention to the heterogeneous levels of competition in EMU banking systems. We enhanced the ECB MFI interest rate statistics by calculating a lending rate average weighted by loan volumes for each EMU member country. Employing a modified Lerner Index, our unique data set enables us to calculate banks' price setting power in the national lending business alone, instead of measuring market power for banks' total business. For 12 countries, we ultimately show that market power in the exclusive segment of lending is greater than market power in total banking business. In an OLS regression model, we investigate to what extent loan rate variations can be explained by changing degrees of market power during the period 2003-2009. Significant cross-country differences can be observed. We find that changes in the national degree of competition considerably affect funding conditions in the individual countries and therefore hinder a homogeneous transmission of ECB monetary policy.

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    File URL: http://www.fww.ovgu.de/fww_media/femm/femm_2012/2012_10.pdf
    File Function: First version, 2011
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    Bibliographic Info

    Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 120010.

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    Length: 32 pages
    Date of creation: Mar 2012
    Date of revision:
    Handle: RePEc:mag:wpaper:120010

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    Keywords: banking competition; European Monetary Union; Lerner Index; monetary policy;

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