Regional Versus Global Integration of Eurozone Retail Banking Markets : Understanding the Recent Evidence from Price-Based Integration Measures

This study investigates the current state of eurozone banking market integration by applying price convergence and cointegration measures to mortgage and short-term corporate loan rates. These two measures of integration often lead to contradicting conclusions and are therefore comparatively analyzed. As an innovation to the literature, price convergence measures are exposed to a difference-in-differences methodology which allows separating eurozone-specific from global integration effects. Our results show that eurozone-specific convergence exists mainly in the pre-EMU period. Rolling cointegration analyses, on the other hand, reveal that cointegration is especially prominent before 1993 and after January 1999 but hardly present in between. Overall, we conclude that (1) convergence of retail banking interest rates is largely a result of integrating money and bonds markets in anticipation of the single currency and (2) a monetary union can produce (co)integration when retail rates react similarly to a single monetary policy rate. Thus, for the eurozone it appears that convergence measures provide the most information for the period leading up to the EMU whereas cointegration is more useful during the EMU period as well as prior to the ERM crisis in 1992