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The Dynamics of Bank Spreads and Financial Structure

Listed author(s):
  • Reint Gropp

    ()

    (House of Finance, Goethe University, Frankfurt, Gr├╝neburgplatz 1, 60323 Frankfurt, Germany)

  • Christoffer Kok

    ()

    (European Central Bank, Frankfurt, Kaiserstra├če 29, 60311 Frankfurt am Main, Germany)

  • Jung-Duk Lichtenberger

    ()

    (European Commission, 1049 Brussels, Belgium)

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.

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File URL: http://www.worldscientific.com/doi/abs/10.1142/S2010139214500141
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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Quarterly Journal of Finance.

Volume (Year): 04 (2014)
Issue (Month): 04 ()
Pages: 1-53

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Handle: RePEc:wsi:qjfxxx:v:04:y:2014:i:04:n:s2010139214500141
DOI: 10.1142/S2010139214500141
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  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, Research Centre.
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