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A Test of the Law of One Price in Retail Banking

  • ALFREDO MARTÍN-OLIVER
  • VICENTE SALAS-FUMÁS
  • JESUS SAURINA

This paper investigates the level and the determinants of retail banking interest rate differences among Spanish banks in the period 1989-2003. We find that the interest rates of twenty five different bank loan and deposit products adjust rather rapidly to their long-term values in response to external shocks, as the relative version of the Law of One Price predicts, but the evidence runs contrary to the absolute version of the Law. Credit risk premium, part of the marginal cost of the loans granted by a particular bank, is an important source of interest rate dispersion across banks and loan products, both before and after Spain joined the Euro zone. Therefore, differences in credit risk policies across banks must be taken into account when forming expectations about European retail banking integration. Copyright 2007 The Ohio State University.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 8 (December)
Pages: 2021-2040

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:8:p:2021-2040
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  12. Bikker, Jacob A. & Haaf, Katharina, 2002. "Competition, concentration and their relationship: An empirical analysis of the banking industry," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2191-2214, November.
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  15. Berger, Allen N & Udell, Gregory F, 1992. "Some Evidence on the Empirical Significance of Credit Rationing," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 1047-77, October.
  16. Juan Fernández De Guevara & Joaquín Maudos, 2007. "Explanatory Factors Of Market Power In The Banking System," Manchester School, University of Manchester, vol. 75(3), pages 275-296, 06.
  17. Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesús Saurina, 2005. "Interest rate dispersion in deposit and loan markets," Banco de Espa�a Working Papers 0506, Banco de Espa�a.
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