Mortgage interest rate dispersion in the euro area

Despite the remarkable economic and financial convergence over the last ten years in the euro area, mortgage interest rates still differ across countries. This note presents some stylised facts on the heterogeneity of mortgage interest rates across euro area countries on the basis of the Eurosystem’s harmonised MFI interest rate statistics. We also attempt to provide some insights into the reasons behind these cross-country differences using the methodology recently proposed by Affinito and Farabullini (2006). We differ from Affinito and Farabullini (2006) in that we focus on one particular banking market: the market for mortgage loans. This allows us to identify more clearly the role of specific structural features characterising that market in explaining mortgage rate dispersion. More specifically, we investigate the extent to which various mortgage loan demand and supply determinants help explaining the observed dispersion. It turns out that some of the heterogeneity can be explained by these factors, in particular those that relate to the supply side. However, a substantial part of the dispersion remains unexplained suggesting that much of the heterogeneity also reflects country-specific institutional differences that are likely to be caused by differences in the regulatory and fiscal framework of the mortgage markets. In order to test this, we extend our analysis to also include institutional factors and indeed find that crosscountry differences in enforcement procedures, tax subsidies and loan-to-value ratios influence the level of mortgage rates. JEL Classification: C23, E4, F36, G21, N24euro area, financial integration, Interest Rates, Mortgage markets

Euro area banking sector integration: using hierarchical cluster analysis techniques

In this study we apply cluster analysis techniques, including a novel smoothing method, to detect some basic patterns and trends in the euro area banking sector in terms of the degree of homogeneity of countries. We find that in the period 1998-2004 the banking sectors in the euro area countries seem to have become somewhat more homogeneous, although the results are not unequivocal and considerable differences remain, leaving scope for further integration. In terms of clustering, the Western and Central European countries (like Germany, France, Belgium, and to some extent also the Netherlands, Austria and Italy) tend to cluster together, while Spain and Portugal and more recently also Greece usually are in the same distinct cluster. Ireland and Finland form separate clusters, but overall tend to be closer to the Western and Central European cluster. JEL Classification: C49, F36, G21banking sector, cluster analysis, financial integration

Modelling loans to non-financial corporations in the euro area

We model the determinants of loans to non-financial corporations in the euro area. Using the Johansen (1992) methodology, we identify three cointegrating relationships. These relationships are interpreted as the long-run loan demand, investment and loan supply equations. The short-run dynamics of loan demand for the euro area are subsequently modelled by means of a Vector Error Correction Model (VECM). We perform a number of specification tests, which suggest that developments in loans to non-financial corporations in the euro area can be reasonably explained by the model. We then use the estimated model to analyse the impact of permanent and temporary shocks to the policy rate on bank lending to nonfinancial corporations. JEL Classification: C32, C51bank credit, cointegration, error-correction model, euro area, non-financial corporations

The dynamics of bank spreads and financial structure

This paper investigates the dynamics of the pass-through between market interest rates and bank interest rates in the euro area as a function of cyclical and structural differences in the financial system. We find that overall the speed of adjustment for loans is significantly faster than for deposits, and that the pass-through is especially sluggish for demand deposits and savings deposits. Bank soundness, credit risk and interest rate risk are found to exert a significant influence on the speed of pass through. We also find evidence of faster (slower) pass-through for loans (deposits) if the change in monetary policy was up (down). Overall, we find that competition among banks and competition from financial markets result in a faster bank interest rate pass-through. Finally, we find some evidence that financial innovation speeds up the pass-through for those market segments that are most directly affected by these innovations. JEL Classification: E43, G21banks, financial structure, monetary transmission, retail rates

Macroeconomic propagation under different regulatory regimes: Evidence from an estimated DSGE model for the euro area

The financial crisis clearly illuminated the potential amplifying role of financial factors on macroeconomic developments. Indeed, the heavy impairments of banks’ balance sheets brought to the fore the banking sector’s ability to provide a smooth flow of credit to the real economy. However, most existing structural macroeconomic models fail to take into account the crucial role of banks’ balance sheet adjustment in the propagation of shocks to the economy. This paper contributes to fill this gap, analyzing the role of credit market frictions in business cycle fluctuations and in the transmission of monetary policy. We estimate a closed-economy dynamic stochastic general equilibrium (DSGE) model for the euro area with financially-constrained households and firms and embedding an oligopolistic banking sector facing capital constraints. Using this setup we examine the macroeconomic implications of various financial frictions on the supply and demand of credit, and in particular we assess the effects of introducing risk-sensitive and more stringent capital requirements. Finally, we explore the scope for counter-cyclical bank capital rules and the strategic complementarities between macro-prudential tools and monetary policy. JEL Classification: E4, E5, F4banking, Bayesian estimation, DSGE Models, financial regulation

Do bank loans and credit standards have an effect on output? A panel approach for the euro area

Applying the identification strategy employed by Driscoll (2004) for the United States, this paper provides empirical evidence for the existence of a bank lending channel of monetary policy transmission in the euro area. In addition, and in contrast to recent findings for the US, we find that in the euro area changes in the supply of credit, both in terms of volumes and in terms of credit standards applied on loans to enterprises, have significant effects on real economic activity. This highlights the importance of the monitoring of credit developments in the toolkit of monetary policy and underpins the reasoning behind giving monetary and credit analysis a prominent role in the monetary policy strategy of the ECB. It also points to the potential negative repercussions on real economic growth of bank balance sheet impairments arising in the context of the financial crisis erupting in mid-2007 which led to the need for banks to delever their balance sheets and possibly to reduce their loan supply. JEL Classification: C23, E51, E52, G21bank credit, bank lending channel, euro area, panel data

A new approach to measuring competition in the loan markets of the euro area

This paper is the first that applies a new measure of competition, the Boone indicator, to the banking industry. This approach is able to measure competition of bank market segments, such as the loan market, whereas many well-known measures of competition can consider the entire banking market only. A caveat of the Boone-indicator may be that it assumes that banks generally pass on at least part of their efficiency gains to their clients. Like most other model-based measures, this approach ignores differences in bank product quality and design, as well as the attractiveness of innovations. We measure competition on the lending markets in the five major EU countries as well as, for comparison, the UK, the US and Japan. Bearing the mentioned caveats in mind, our findings indicate that over the period 1994-2004 the US had the most competitive loan market, whereas overall loan markets in Germany and Spain were among the best competitive in the EU. The Netherlands occupied a more intermediate position, whereas in Italy competition declined significantly over time. The French, Japanese and UK loan markets were generally less competitive. Turning to competition among specific types of banks, commercial banks tend to be more competitive, particularly in Germany and the US, than savings and cooperative banks. JEL Classification: D4, G21, L1Banking industry, competition, loan markets, marginal costs, market shares

Impact of bank competition on the interest rate pass-through in the euro area

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. JEL Classification: C23, D4, E50, G21, L10banks, competition, monetary transmission, panel data, retail rates

A new approach to measuring competition in the loan markets of the euro area

This paper is the first that applies a new measure of competition, the Boone indicator, to the banking industry. This approach is able to measure competition of bank market segments, such as the loan market, whereas many well-known measures of competition can consider the entire banking market only. A caveat of the Boone-indicator may be that it assumes that banks generally pass on at least part of their efficiency gains to their clients. Like most other model-based measures, this approach ignores differences in bank product quality and design, as well as the attractiveness of innovations. We measure competition on the lending markets in the five major EU countries as well as, for comparison, the UK, the US and Japan. Bearing the mentioned caveats in mind, our findings indicate that over the period 1994-2004 the US had the most competitive loan market, whereas overall loan markets in Germany and Spain were among the best competitive in the EU. The Netherlands occupied a more intermediate position, whereas in Italy competition declined significantly over time. The French, Japanese and UK loan markets were generally less competitive. Turning to competition among specific types of banks, commercial banks tend to be more competitive, particularly in Germany and the US, than savings and cooperative banks.Banking industry, competition, loan markets, marginal costs, market shares

Impact of bank competition on the interest rate pass-through in the euro area

Incluye bibliografíaThis 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 ratesin 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 effectiv