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The Dynamics of Bank Spreads and Financial Structure

Reint Gropp

House of Finance, Goethe University, Frankfurt, Grüneburgplatz 1, 60323 Frankfurt, Germany

Corresponding author.

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Christoffer Kok

European Central Bank, Frankfurt, Kaiserstraße 29, 60311 Frankfurt am Main, Germany

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, and

Jung-Duk Lichtenberger

European Commission, 1049 Brussels, Belgium

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https://doi.org/10.1142/S2010139214500141Cited by:32 (Source: Crossref)

Abstract

This paper investigates the effect of within banking sector competition and competition from financial markets on the dynamics of the transmission from monetary policy rates to retail bank interest rates in the euro area. We use a new dataset that permits analysis for disaggregated bank products. Using a difference-in-difference approach, we test whether development of financial markets and financial innovation speed up the pass through. We find that more developed markets for equity and corporate bonds result in a faster pass-through for those retail bank products directly competing with these markets. More developed markets for securitized assets and for interest rate derivatives also speed up the transmission. Further, we find relatively strong effects of competition within the banking sector across two different measures of competition. Overall, the evidence supports the idea that developed financial markets and competitive banking systems increase the effectiveness of monetary policy.

Keywords:

JEL: E43, G21

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