Research Discussion Papers, Bank of Finland
No 27/2009:
Inferring market power from retail deposit interest rates in the euro area
Laura Vajanne ()
Abstract: This paper tests for the existence of market power in
banking, using data on demand deposit rates of households and corresponding
market rates in five euro area countries. An implicit measure for market
power is based on a partial adjustment model that also allows for an
asymmetric response of deposit rates to changes in market rates. The period
covers the ten years since introduction of the euro. The analysis indicates
that banks are exercising major market power within the euro area. In
addition to general sluggishness, bank deposit rates’ reactions are clearly
asymmetric: flexible when market rates are decreasing and rigid when rates
are increasing. The degree of asymmetric behaviour can be interpreted as a
further indication of the market power banks exercise. Despite country
differences, a general pattern of interest rate adjustment in demand
deposit pricing is observable.
Keywords: competition; banking industry; retail interest rates; (follow links to similar papers)
JEL-Codes: G21; L11; L13; (follow links to similar papers)
31 pages, November 2, 2009
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