A New Metric for Banking Integration in Europe

34 Pages Posted: 21 Feb 2009  

Reint Gropp

Halle Institute for Economic Research

Anil K. Kashyap

University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Date Written: February 2009

Abstract

Most observers have concluded that while money markets and government bond markets are rapidly integrating following the introduction of the common currency in the euro area, there is little evidence that a similar integration process is taking place for retail banking. Data on cross-border retail bank flows, cross-border bank mergers and the law of one price reveal no evidence of integration in retail banking. This paper shows that the previous tests of bank integration are weak in that they are not based on an equilibrium concept and are neither necessary nor sufficient statistics for bank integration. The paper proposes a new test of integration based on convergence in banks' profitability. The new test emphasises the role of an active market for corporate control and of competition in banking integration. European listed banks profitability appears to converge to a common level. There is weak evidence that competition eliminates high profits for these banks, and underperforming banks tend to show improved profitability. Unlisted European banks differ markedly. Their profits show no tendency to revert to a common target rate of profitability. Overall, the banking market in Europe appears far from being integrated. In contrast, in the U.S. both listed and unlisted commercial banks profits converge to the same target, and high profit banks see their profits driven down quickly.

Suggested Citation

Gropp, Reint and Kashyap, Anil K., A New Metric for Banking Integration in Europe (February 2009). NBER Working Paper No. w14735. Available at SSRN: https://ssrn.com/abstract=1347218

Reint Gropp

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
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D-06017 Halle, 06108
Germany

Anil K. Kashyap (Contact Author)

University of Chicago, Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7260 (Phone)
773 702-0458 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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773-702-7260 (Phone)
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Federal Reserve Bank of Chicago ( email )

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Chicago, IL 60604
United States

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