Impact of bank competition on the interest rate pass-through in the euro area
By Michiel van Leuvensteijn, C. K. Sørensen, J. Bikker, A. V. van Rixtel. Social Science Research Network, 2013
337 citations recorded by the source corpus.
This article analyses the impact of loan market competition on the interest rates applied by euro area banks to loans during the period 1994–2004, 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, in line with expectations. This result implies that stronger competition causes both lower bank interest rates and a stronger pass-through of market rate changes into bank rates. Evidence of the latter is also presented by our Error Correction Model (ECM) for bank rates. Further, banks compensate income losses from increased loan market competition by offering lower deposit rates. Our findings with respect to the loan market rates have important monetary policy implications, as they suggest that measures to promote competition in the European banking sector are likely to render the monetary policy transmission mechanism more effective.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/349f0979a5a6b1c656011d447be70aef26ddad2c
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Citations in the corpus
- Do microfinance institutions accomplish their mission? Evidence from the relationship between traditional financial sector development and microfinance institutions’ outreach and performance (2013, background): “In well-developed banking systems banks stand in more direct competition with each other, which reduces the interest rate spread (van Leuvensteijn et al., 2008).”