Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153319
Authors: 
van Leuvensteijn, Michiel
Sørensen, Christoffer Kok
Bikker, Jacob A.
van Rixtel, Adrian A.R.J.M.
Year of Publication: 
2008
Series/Report no.: 
ECB Working Paper 885
Abstract: 
This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective.
Subjects: 
banks
competition
monetary transmission
panel data
retail rates
JEL: 
C23
D4
E50
G21
L10
Document Type: 
Working Paper

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