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

This article 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. 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. 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.

[1]  María J Nieto,et al.  Preconditions for a successful implementation of supervisors' prompt corrective action: Is there a case for a banking standard in the EU? , 2006 .

[2]  J. Tatom,et al.  Federal Reserve Bank of St. Louis Review , 1601 .

[3]  Simone Manganelli,et al.  What Drives Spreads in the Euro Area Government Bond Market? , 2007 .

[4]  Jan Boone,et al.  A New Way to Measure Competition , 2004 .

[5]  F. Browne,et al.  Commodity Prices, Money and Inflation , 2007, SSRN Electronic Journal.

[6]  R. Gimeno,et al.  Genetic Algorithm Estimation of Interest Rate Term Structure , 2006 .

[7]  Joseph G. Haubrich,et al.  Bank Concentration and Competition: An Evolution in the Making , 2004 .

[8]  Nicholas Georgescu-Roegen,et al.  Economics of Production. , 1928, Nature.

[9]  J. Bikker,et al.  Trends in Competition and Profitability in the Banking Industry: A Basic Framework , 2005 .

[10]  R. Jiménez‐Rodríguez.  The Industrial Impact of Oil Price Shocks: Evidence from the Industries of Six OECD Countries , 2007 .

[11]  Franklin Allen,et al.  COMPETITION AMONG BANKS: INTRODUCTION AND CONFERENCE OVERVIEW , 2001 .

[12]  P. Kujal,et al.  Cost Effectiveness of R&D and Strategic Trade Policy , 2007 .

[13]  Philip Molyneux,et al.  Cross-Country Comparisons of Competition and Pricing Power in , 2006 .

[14]  Anton A. Nakov,et al.  Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate , 2005 .

[15]  Guido Wolswijk.  Short- and Long-Run Tax Elasticities: The Case of the Netherlands , 2007, SSRN Electronic Journal.

[16]  A. Erce-Domínguez.  Using standstills to manage sovereign debt crises , 2006 .

[17]  F. Mongelli,et al.  The Eurosystem, the US Federal Reserve and the Bank of Japan: Similarities and Differences , 2007, SSRN Electronic Journal.

[18]  Anton A. Nakov,et al.  Oil and the Great Moderation , 2007 .

[19]  P. Levine,et al.  Linear-Quadratic Approximation, External Habit and Targeting Rules , 2007, SSRN Electronic Journal.

[20]  Jiří Podpiera,et al.  Transition Economy Convergence in a Two-Country Model: Implications for Monetary Integration , 2007, SSRN Electronic Journal.

[21]  L. Laeven,et al.  What Drives Bank Competition? Some International Evidence , 2003 .

[22]  F. Canova,et al.  The Labour Market Effects of Technology Shocks , 2007 .

[23]  Caterina Mendicino.  Credit Market and Macroeconomic Volatility , 2007, SSRN Electronic Journal.

[24]  Paolo Coccorese.  Competition in markets with dominant firms: A note on the evidence from the Italian banking industry , 2005 .

[25]  Michael L. Smirlock.  Evidence on the (Non) Relationship between Concentration and Profitability in Banking , 1985 .

[26]  L. Spierdijk,et al.  How Banking Competition changed over Time , 2008 .

[27]  Parametric Properties of Semi-Nonparametric Distributions, with Applications to Option Valuation , 2009 .

[28]  Allan D. Brunner.  Germany's three-pillar banking system : cross-country perspectives in Europe , 2004 .

[29]  Jan Boone,et al.  Intensity of competition and the incentive to innovate , 2001 .

[30]  E. Papaioannou,et al.  Red Tape and Delayed Entry , 2006 .

[31]  R. Simper,et al.  Competition and efficiency in UK banking: the impact of corporate ownership structure , 2003 .

[32]  Adnan Kasman,et al.  Cost and profit efficiencies in transition banking: the case of new EU members , 2006 .

[33]  J. Bos.  European Banking : Market Power and Efficiency , 2002 .

[34]  Fernando Nieto.  The Determinants of Household Credit in Spain , 2007 .

[35]  A. Dieppe,et al.  Modelling Intra- and Extra-Area Trade Substitution and Exchange Rate Pass-Through in the Euro Area , 2006, SSRN Electronic Journal.

[36]  L. Bauwens,et al.  Econometrics , 2005 .

[37]  Julian von Landesberger.  Sectoral Money Demand Models for the Euro Area Based on a Common Set of Determinants , 2007, SSRN Electronic Journal.

[38]  A. Rixtel.  Informality and Monetary Policy in Japan: The Political Economy of Bank Performance , 2002 .

[39]  Javier Delgado,et al.  Determinantes de la morosidad bancaria en una economía dolarizada. El caso uruguayo , 2007 .

[40]  Elena Angelini,et al.  Econometric Analyses with Backdated Data: Unified Germany and the Euro Area , 2007, SSRN Electronic Journal.

[41]  Gabriel Jiménez,et al.  Modelling the Distribution of Credit Losses with Observable and Latent Factors , 2007 .

[42]  S. Lecq,et al.  Recensie Bank performance; a theoretical and empirical framework for the analysis of profitability, competition and efficiency / J.A. Bikker; J.W.B. Bos. New York: Routledge , 2008 .

[43]  D. Navia,et al.  Equilibrium Exchange Rates in the New EU Members: External Imbalances vs. Real Convergence , 2007 .

[44]  Anton A. Nakov,et al.  Inflation-Output Gap Trade-Off With a Dominant Oil Supplier , 2007 .

[45]  Ilja Kristian Kavonius,et al.  Durable Goods and their Effect on Household Saving Ratios in the Euro Area , 2007 .

[46]  Measuring Competition , 2005 .

[47]  Javier Andrés,et al.  Bemod: A DSGE Model for the Spanish Economy and the Rest of the Euro Area , 2006 .

[48]  M. Agostino,et al.  Profits persistence and ownership: evidence from the Italian banking sector , 2005 .

[49]  F. Boissay,et al.  Trade Credit Defaults and Liquidity Provision by Firms , 2007 .

[50]  Nicola Cetorelli.  Real Effects of Bank Competition , 2004 .

[51]  I. Hernando,et al.  Competition and Price Adjustment in the Euro Area , 2006 .

[52]  E. Hahn,et al.  Exchange Rate Pass-Through in Emerging Markets , 2007, SSRN Electronic Journal.

[53]  Athanasios Orphanides,et al.  Robust Monetary Policy with Imperfect Knowledge , 2007, SSRN Electronic Journal.

[54]  J. Campa,et al.  The Reaction by Industry Insiders to M&As in the European Financial Industry , 2008 .

[55]  Jacob A. Bikker,et al.  Bank Performance: A Theoretical and Empirical Framework for the Analysis of Profitability, Competition and Efficiency , 2008 .

[56]  Torsten Wezel,et al.  International Financial Linkages of Latin American Banks: The Effects of Political Risk and Deposit Dollarisation , 2007 .

[57]  Marcel Fratzscher,et al.  The Transmission of Emerging Market Shocks to Global Equity Markets , 2007, SSRN Electronic Journal.

[58]  Anoop Rai,et al.  The structure-performance relationship for European banking , 1996 .

[59]  An Assessment of Basel II Procyclicality in Mortgage Portfolios , 2007 .

[60]  L. Julián,et al.  What Do Micro Price Data Tell Us on the Validity of the New Keynesian Phillips Curve , 2008 .

[61]  Nicola Cetorelli,et al.  The Effects of Regulatory Reform on Competition in the Banking Industry , 2003 .

[62]  J. Bikker,et al.  Competition, concentration and their relationship: an empirical analysis of the banking industry , 2002 .

[63]  P. Engler,et al.  *External Imbalances and the Us Current Account: How Supply-Side Changes Affect an Exchange Rate Adjustment , 2007 .

[64]  F. Lozano,et al.  Macroeconomic modelling in emu: how relevant is the change in regime? , 2007 .

[65]  Lieven Baele,et al.  Measuring financial integration in the euro area , 2004 .

[66]  Burak Günalp,et al.  Competition in the Turkish banking industry , 2006 .

[67]  C. Cottarelli,et al.  Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy , 1994 .

[68]  E. Cantillon,et al.  How and When Do Markets Tip? Lessons from the Battle of the Bund , 2007, SSRN Electronic Journal.

[69]  J. Campa,et al.  Current Accounts in the Euro Area: An Intertemporal Approach , 2007 .

[70]  Ludger Schuknecht,et al.  Structural Balances and Revenue Windfalls: The Role of Asset Prices Revisited , 2007, SSRN Electronic Journal.

[71]  Luis Gutiérrez de Rozas,et al.  Testing for Competition in the Spanish Banking Industry: The Panzar-Rosse Approach Revisited , 2007 .

[72]  P. Albarrán,et al.  Inequality for Wage Earners and Self-Employed: Evidence from Panel Data , 2007 .

[73]  Chung-Hua Shen,et al.  Cost efficiency and banking performances in a partial universal banking system: application of the panel smooth threshold model , 2005 .

[74]  Ludger Schuknecht,et al.  The cyclicality of consumption, wages and employment of the public sector in the euro area , 2007, SSRN Electronic Journal.

[75]  Marcel Jansen,et al.  Employment Fluctuations with Downward Wage Rigidity: The Role of Moral Hazard , 2006, SSRN Electronic Journal.

[76]  Harald Stahl,et al.  Price Setting in the Euro Area: Some Stylised Facts from Individual Producer Price Data , 2007, SSRN Electronic Journal.

[77]  Andrea Zaghini,et al.  Excess Money Growth and Inflation Dynamics , 2008, SSRN Electronic Journal.

[78]  Samuel Reynard,et al.  Maintaining Low Inflation: Money, Interest Rates, and Policy Stance , 2007, SSRN Electronic Journal.

[79]  Christian M. Pfeil,et al.  Regulation and Competition in German Banking: An Assessment , 2003 .

[80]  Alfredo Martín-Oliver,et al.  Measurement of Capital Stock and Input Services of Spanish Banks , 2007 .

[81]  Margaret Z. Clarke.  Geographic Deregulation of Banking and Economic Growth , 2004 .

[82]  John C. Panzar,et al.  TESTING FOR "MONOPOLY" EQUILIBRIUM* , 1987 .

[83]  Marta Bańbura,et al.  A Look into the Factor Model Black Box: Publication Lags and the Role of Hard and Soft Data in Forecasting GDP , 2007, SSRN Electronic Journal.

[84]  Gregory J. Jonas.  Moody's Investors Service , 2006 .

[85]  Shelagh A. Heffernan.  How do UK financial institutions really price their banking products , 2002 .

[86]  B. E. Gup.  Too Big to Fail: Policies and Practices in Government Bailouts , 2003 .

[87]  J. Bikker,et al.  Competition and efficiency in the Dutch life insurance industry , 2008 .

[88]  Roger Ware,et al.  Industrial Organization: A Strategic Approach , 1999 .

[89]  V. Salas-Fumás,et al.  Governance Mechanisms in Spanish Banks: Does Ownership Matter? , 2003 .

[90]  Fabio Canova,et al.  Back to Square One: Identification Issues in DSGE Models , 2009, SSRN Electronic Journal.

[91]  Oscar Calvo-Gonzalez,et al.  Financial Dollarization: The Role of Banks and Interest Rates , 2007 .

[92]  D. Jorgenson.  Econometric Methods for Modeling Producer Behavior , 1986 .

[93]  Hurvey Leibenstein.  Allocative efficiency vs. X-Efficiency , 1966 .

[94]  Nuno C. Martins,et al.  Does Limited Access to Mortgage Debt Explain Why Young Adults Live with Their Parents? , 2006 .

[95]  José María Serena,et al.  Global Financial Integration, Monetary Policy and Reserve Accumulation: Assessing the Limits in Emerging Economies , 2007 .

[96]  L. Gambacorta,et al.  Are there asymmetries in the response of bank interest rates to monetary shocks? , 2007 .

[97]  Lawrence J. Lau,et al.  On identifying the degree of competitiveness from industry price and output data , 1982 .

[98]  Francisco Perez,et al.  Competition and efficiency in the Spanish banking sector: the importance of specialization , 2002 .

[99]  Cristina Barceló.  A Q-Model of Labour Demand , 2006 .

[100]  Gianni Amisano,et al.  Euro Area Inflation Persistence in an Estimated Nonlinear DSGE Model , 2006, SSRN Electronic Journal.

[101]  Y. Tsutsui,et al.  Discussion Papers In Economics And Business Has Competition in the Japanese Banking Sector Improved ? , 2003 .

[102]  Francisco Alonso,et al.  Implied Default Barrier in Credit Default Swap Premia , 2008 .

[103]  Timothy F. Bresnahan,et al.  The oligopoly solution concept is identified , 1982 .

[104]  Jacob A. Bikker,et al.  Competition and Efficiency in a Unified European Banking Market , 2004 .

[105]  M. Pesaran,et al.  Long Run Macroeconomic Relations in the Global Economy , 2007, SSRN Electronic Journal.

[106]  Nicola Cetorelli.  Competition among banks: good or bad? , 2001 .

[107]  Francisco Alonso,et al.  Option-implied preferences adjustments, density forecasts, and the equity risk premium , 2006 .

[108]  J. Ruiz,et al.  The Wise Use of Dummies in Gravity Models: Export Potentials in the Euromed Region , 2007 .

[109]  H. Hempell,et al.  Oligopoly and Conduct in Banking - An Empirical Analysis - ∗ , 2005 .

[110]  Alpo Willman.  Sequential Optimization, Front-Loaded Information, and U.S. Consumption , 2007, SSRN Electronic Journal.

[111]  J. Bikker.  Testing for imperfect competition on EU deposit and loan markets with Bresnahan's market power model , 2003 .

[112]  Kenneth D. Jones,et al.  Consolidation in the U.S. Banking Industry: Is the "Long, Strange Trip" About to End? , 2005 .

[113]  Linda A. Toolsema.  Competition in the Dutch consumer credit market , 2002 .

[114]  Loretta J. Mester,et al.  Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions? , 1997 .

[115]  A New Way to Measure Competition , 2004 .

[116]  Carmen Broto,et al.  Local Debt Expansion... Vulnerability Reduction? An Assessment for Six Crises-Prone Countries , 2007 .

[117]  Roland Straub,et al.  Tax Reform and Labour-Market Performance in the Euro Area: A Simulation-Based Analysis Using the New Area-Wide Model , 2007, SSRN Electronic Journal.

[118]  Yupana Wiwattanakantang,et al.  Banking in Japan: Will "Too Big To Fail" Prevail? , 2002 .

[119]  A. Hackethal.  German Banks and Banking Structure , 2004 .