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

Author

Listed:
  • Michiel van Leuvensteijn

    (CPB - Netherlands Bureau for Economic Policy Analysis)

  • Christoffer Kok Sorensen

    (Directorate General Economics - European Central Bank)

  • Jacob A. Bikker

    (Supervision Strategy - DNB)

  • Adrian A.R.J.M. van Rixtel

    (International Economics and International Relations Department - Banco de España)

Abstract
This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans 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, 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 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.

Suggested Citation

  • Michiel van Leuvensteijn & Christoffer Kok Sorensen & Jacob A. Bikker & Adrian A.R.J.M. van Rixtel, 2011. "Impact of bank competition on the interest rate pass-through in the euro area," Post-Print hal-00763955, HAL.
    • Handle: RePEc:hal:journl:hal-00763955
    DOI: 10.1080/00036846.2011.617697
    Note: View the original document on HAL open archive server: https://hal.science/hal-00763955
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    Keywords

    Social Sciences & Humanities;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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