Research Discussion Papers, Bank of Finland
No 27/2007:
Integration in euro area retail banking markets – convergence of credit interest rates
Laura Vajanne ()
Abstract: Since the introduction of the single currency in 1999,
major progress has been made towards achieving an integrated European
capital and financial market. Available evidence suggests, nevertheless,
that the degree of integration varies greatly depending on market segment.
Retail banking markets are generally seen to be much less integrated than
other segments of financial markets. Most consumers still buy retail
financial services from domestic suppliers, cross-border entry of financial
services firms is rare – even if it is growing – and the range of products
available or terms attached thereto differ substantially across euro area
countries. The purpose of this paper is to assess integration of retail
banking in the euro area from January 2003 to December 2006. The empirical
analysis is based on a monthly panel of recently published harmonised
interest rates from euro area monetary financial institutions. We estimate
two commonly used measures of convergence, namely â- and ó-convergence, to
assess the speed and degree of integration. Tests for convergence are based
on a panel unit root test. The tests provide evidence of a process of
convergence in retail banking credit interest rates for households and
non-financial corporations and show this convergence has recently being
continuing. Thus, even if there are substantial cross-country differences
in interest rate levels, progress towards integration is observable.
Keywords: financial market integration; euro area interest rates; panel data estimation; (follow links to similar papers)
JEL-Codes: F36; G21; (follow links to similar papers)
29 pages, December 22, 2007
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