Financial Integration Through Benchmarks: The European Banking Sector

33 Pages Posted: 20 Nov 2006

See all articles by G. A. Moerman

G. A. Moerman

AEGON Asset Management; Erasmus University Rotterdam (EUR) - Department of Financial Management

Ronald Mahieu

Tilburg University - Center for Economic Research, Econometrics and Finance Group; TiasNimbas Business School

Kees C. G. Koedijk

Tilburg University - Department of Finance

Date Written: 22 2004, 12

Abstract

European banking regulation has been harmonized to a high degree over the last few decades. Nevertheless, the European banking industry remains fragmented as shown by the relatively high market shares of banks in their home countries. In this paper we concentrate on the integration process of European bank share prices. We develop a parsimonious model that is able to detect different integration (correlation) regimes. The model is applied to a set of 41 European banks that have a continuous share price listing over the period January 1990 – March 2003. Our main finding is that the correlation between larger banks in Europe has increased substantially over this period, whereas the correlation between smaller banks has become lower. A reason for this result could be that investors perceive that the activities of bigger banks get more integrated. Another reason may be that as a result of institutional and other larger investors turning their investment strategies towards a European sector-based approach, investors are tracking indices of the European banking sector. These indices are typically constructed from the stock prices of the larger banks. This would create an incentive for large banks to become more integrated with other large banks.

Keywords: bank integration, equity market integration, bank risk, European banks, regime-switching

JEL Classification: M, G3, G15

Suggested Citation

Moerman, Gerard A. and Mahieu, Ronald J. and Koedijk, Kees G., Financial Integration Through Benchmarks: The European Banking Sector (22 2004, 12). ERIM Report Series Reference No. ERS-2004-110-F&A. Available at SSRN: https://ssrn.com/abstract=639484

Gerard A. Moerman (Contact Author)

AEGON Asset Management ( email )

P.O. Box 202
2501 CE The Hague
Netherlands
+31 70 344 8318 (Phone)

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

Ronald J. Mahieu

Tilburg University - Center for Economic Research, Econometrics and Finance Group ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2430 (Phone)
+31 13 466 3280 (Fax)

HOME PAGE: http://center.uvt.nl/staff/mahieu/

TiasNimbas Business School ( email )

Warandelaan 2
Tilburg, North-Brabant 5071HS
Netherlands

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

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