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The Dynamics of Bank Spreads and Financial Structure

Author

Listed:
  • Reint Gropp

    () (House of Finance, Goethe University, Frankfurt, Grüneburgplatz 1, 60323 Frankfurt, Germany)

  • Christoffer Kok

    () (European Central Bank, Frankfurt, Kaiserstraße 29, 60311 Frankfurt am Main, Germany)

  • Jung-Duk Lichtenberger

    () (European Commission, 1049 Brussels, Belgium)

Abstract

This paper investigates the effect of within banking sector competition and competition from financial markets on the dynamics of the transmission from monetary policy rates to retail bank interest rates in the euro area. We use a new dataset that permits analysis for disaggregated bank products. Using a difference-in-difference approach, we test whether development of financial markets and financial innovation speed up the pass through. We find that more developed markets for equity and corporate bonds result in a faster pass-through for those retail bank products directly competing with these markets. More developed markets for securitized assets and for interest rate derivatives also speed up the transmission. Further, we find relatively strong effects of competition within the banking sector across two different measures of competition. Overall, the evidence supports the idea that developed financial markets and competitive banking systems increase the effectiveness of monetary policy.

Suggested Citation

  • Reint Gropp & Christoffer Kok & Jung-Duk Lichtenberger, 2014. "The Dynamics of Bank Spreads and Financial Structure," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(04), pages 1-53.
  • Handle: RePEc:wsi:qjfxxx:v:04:y:2014:i:04:n:s2010139214500141
    DOI: 10.1142/S2010139214500141
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    References listed on IDEAS

    as
    1. Weth, Mark A., 2002. "The pass-through from market interest rates to bank lending rates in Germany," Discussion Paper Series 1: Economic Studies 2002,11, Deutsche Bundesbank.
    2. Kok, Christoffer & Werner, Thomas, 2006. "Bank interest rate pass-through in the euro area: a cross country comparison," Working Paper Series 580, European Central Bank.
    3. Gambacorta, Leonardo, 2008. "How do banks set interest rates?," European Economic Review, Elsevier, vol. 52(5), pages 792-819, July.
    4. Castelnuovo, Efrem & Nicoletti-Altimari, Sergio & Rodriguez-Palenzuela, Diego, 2003. "Definition of price stability, range and point inflation targets: the anchoring of long-term inflation expectations," Working Paper Series 273, European Central Bank.
    5. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704.
    6. de Bondt, Gabe, 2002. "Retail bank interest rate pass-through: new evidence at the euro area level," Working Paper Series 0136, European Central Bank.
    7. Carol Ann Northcott, 2004. "Competition in Banking: A Review of the Literature," Staff Working Papers 04-24, Bank of Canada.
    8. 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.
    9. Morgan, Julian & Locarno, Alberto & Vallés, Javier & Berben, Robert-Paul, 2004. "Cross-country differences in monetary policy transmission," Working Paper Series 400, European Central Bank.
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    More about this item

    Keywords

    Monetary transmission mechanism; financial innovation; financial structure; bank retail rates; difference in difference estimation; E43; G21;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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