Integration in European Retail Banking : Evidence from savings and lending rates to the household sector

The aim of this paper is to examine the integration process within the European Union retail banking sector during the period 1991-2008 by analysing deposit and lending rates to households. An important contribution of the paper is the application of the recently developed Phillips and Sul (2007a) panel convergence methodology which has not hitherto been employed in this area. This method analyses the degree as well as the speed of convergence, identifies the presence of club formation, and measures the behaviour of each country’s transition path relative to the panel average. We find evidence supporting integration in the deposit and short-term mortgage markets but not in the consumer credit market and longer term mortgages. The club clustering tests suggest that the convergence process is not homogeneous among countries. In addition, it is observed that the speed of convergence is inversely related to the maturity duration for all deposit and lending rates.Submitted Versio

The global financial crisis and integration in European retail banking

This document is the Accepted Manuscript version of the following article: Aarti Rughoo, and Nicolas Sarantis, 'The global financial crisis and integration in European retail banking', Journal of Banking and Finance, Vol. 40: 28-41, March 2014, and is made available under the terms of the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/ The definitive, final Version of Record is available online via: https://doi.org/10.1016/j.jbankfin.2013.11.017The aim of this paper is twofold. Firstly, to investigate the integration process within the European Union retail banking sector by analysing deposit and lending rates to the household sector during the period 2003-2011. Secondly, to assess the impact of the 2008 global financial crisis on the banking integration process, an area that is yet unexplored. An important contribution of the paper is the application of the recently developed Phillips and Sul (2007a) panel convergence methodology which has not hitherto been employed in this area. This method analyses the degree as well as the speed of convergence, identifies the presence of club formation, and measures the behaviour of each country's transition path relative to the panel average. The empirical results point to the presence of convergence in all deposit and lending rates to the household sector up to 2007. In sharp contrast, the null of convergence is rejected in all deposit and credit markets after the onset of the 2008 financial crisis. These results show that the global crisis has had a detrimental effect on the banking integration process. We find some convergence in a few sub-clusters of countries but the rate of convergence is typically slow and several countries are identified as diverging altogether. In addition, we find that the credit market, in general, is far more heterogeneous than the savings market.Peer reviewedFinal Accepted Versio

Integration in the European Retail Banking Sector : Evidence from Deposit and Lending Rates

This paper investigates the degree of integration in the retail-banking sector for 15 European Union member states between the period 1991 to March 2008. In view of consolidating and creating a single market in their financial services sector, the EU has launched and implemented major initiatives over the past years. The wholesale banking sector has been studied extensively but the retail market to a much lesser extent. The difficulty in analysing the integration process in the banking market is linked to the heterogeneity that exists across the European countries with regards to factors such as risk attitudes, cultural differences, and the home-bias criteria. As a result, it is argued that any convergence process in the banking sector, if present, should rather be perceived as a long-run relationship. Consequently, cointegration analysis, a technique used to capture such long-term relationships between sets of variables is used to analyse the integration process in the EU retail-banking sector. The starting point in the empirical analysis involves conducting multiple structural break analysis. Given that during the period under investigation, there have been significant milestones in the history of the European single market, the deposit and lending rates corresponding to this period are likely to exhibit structural change. Moreover, the timing and pattern of structural break occurrence should also act as an indicator of retail banking integration. The next steps in the empirical analysis look at stationarity tests for both time series data and panel data on data series that are also individually demeaned so as to account for structural breaks. Finally, bivariate time-series cointegration analysis on each of the EU countries and a weighted European average rate is performed. The cointegration analysis is performed on both level and demeaned data

Does the Purchasing Power Parity Hold in Emerging Markets? Evidence from Black Market Exchange Rates

We examine the Purchasing Power Parity (PPP) hypothesis using a unique panel of monthly data on black market exchange rates for twenty emerging market economies over the period 19973M1-1993M12. We apply a large number of recent heterogeneous panel unit root and cointegration tests. Panel unit root tests do not favour mean reversion in the real black market exchange rate. The evidence for non-rejection of the unit root hypothesis remains robust even after allowing for structural breaks. Panel cointegration tests support evidence of cointegration between the nominal exchange rate and relative prices. These results contrast with those obtained from unit root tests. Since we believe that the former may be biased by the imposition of the joint symmetry and proportionality restriction, we test for such a restriction using likelihood ratio tests and find that it is strongly rejected.black market exchange rates, purchasing power parity, panel unit root and cointegration tests

Public Capital Maintenance, Decentralization and U.s. Productivity Growth

Data published by the U.S. Congressional Budget Office show that over the last fifty years expenditures for infrastructure�s operations and maintenance (O&M) have roughly equalled those for new capital. We use this dataset to investigate the productive impact of public infrastructure spending taking into account its composition for each government level. We find that a rise (fall) in infrastructure expenditures by states and localities (the federal government) would enhance future productivity growth and that the rise in state and local spending should mainly come from additional O&M outlays in the transport sector.capital, maintenance, fiscal decentralization, private productivity

Estimating the Euler Equation for Aggregate Investment with Endogenous Capital Depreciation

This paper looks at the empirical consequences of introducing endogenous capital depreciation in the standard neoclassical model with quadratic adjustment costs. To this end, we formulate an empirical specification that accommodates capital maintenance and utilization in the Euler equations for aggregate investment. The empirical estimates with data from the Canadian survey on Capital and Repair Expenditures show that, in contrast to the existing literature, the performance of the Euler equations is improved when we account for the impact of variable capital depreciation.Euler equation; endogenous depreciation; maintenance expenditures

Some Empirical Evidence on the Effects of U.S. Monetary Policy Shocks on Cross Exchange Rates

This paper examines the impact of U.S. monetary policy shocks on the cross exchange rates of sterling, yen and mark. The main finding of the paper is a ‘delayed overshooting’ pattern for all currency cross rates examined (sterling/yen, yen/mark and mark/sterling) following an unexpected U.S. monetary policy change, which in turn generates excess returns. We also provide evidence that the ‘delayed overshooting’ pattern in cross exchange rates is accompanied by asymmetric interventions by central banks in the foreign exchange markets under consideration triggered by U.S. monetary policy shocks.Monetary Policy; Delayed Overshooting; Foreign Exchange Intervention

An extended NATREX model for China

This paper extends, for the first time, Stein’s (1995a) NATREX model to China and other similar emerging market economies. We incorporate fundamentals that have not been studied by the existing literature on the NATREX model to capture the unique characteristics of the Chinese economy. Based on dynamic stability analysis, we derive the medium-run and long-run real equilibrium exchange rates and relative prices of non-tradables, and provide a detailed analysis of the effects of fundamentals. The fundamentals that affect the long-run equilibrium real exchange rate and the relative price of non-tradables include terms of trade, total and net factor productivity, rural transformation, dependency ratio, financial liberalization, relative unit labour cost, relative rate of return to capital, government investment, tax rate and the foreign real interest rate

Nonlinear Mean Reversion in Real Exchange Rates: Evidence from Developing and Emerging Market Economies

We provide evidence on nonlinear mean reversion in the real exchange rates of developing and emerging market economies, using recently developed nonlinear unit root tests and a unique set of monthly data on black market exchange rates.