An empirical analysis of European retail banking integration

Rughoo, Aarti (2011) An empirical analysis of European retail banking integration. Doctoral thesis, London Metropolitan University.


The aim of this thesis is to examine whether any integration has taken place within the European Union retail banking sector during the period 1990-2008 by analysing both macro and micro data for the 15 European Union countries. The macro-data analysis is performed on 19 sets of various monthly retail deposit and lending rates to the two components of retail banking, i.e. households and non-financial corporations. The micro-data analysis is perfonned on European retail banks' cost efficiency (cost-income ratios and cost efficiency scores), and profitability (return on asset) data. An important contribution of this thesis is the application of methodologies which have not hitherto been employed in this area. First, cointegration analysis is performed on various deposit and lending data time series. Second, the deposit and lending spread data series are tested for structural breaks and the effects of these breaks are then removed by demeaning each individual spread data series. Third, while allowing for structural breaks, panel unit root tests are applied to all the interest spread data. Fourth, the recently developed Phillips and SuI (2007) panel convergence test is applied to both the macro and micro data to analyse the degree as well as the speed of convergence. In addition, this convergence test identifies the presence of club fonnation, if present, and also measures the behaviour of each country's transition path relative to the panel average. This thesis also carries an extensive analysis of the regulatory environment in the European banking sector. The stochastic structural break tests reveal the presence of structural breaks in all the spread data series and show that the break dates are closely clustered and match key events in the history of the European banking sector. The results on integration depend crucially on which methodology and data is employed. In particular, the findings point to a more heterogeneous consumer credit market compared to the household deposit and mortgage market and the deposit and lending market to non-financial corporations. For several categories of interest rate data, the maturity duration is inversely related to the convergence process, with instruments with longer maturity typically showing more diverse behaviour. With regards to the cost efficiency and profitability of European retail banks, convergence is detected at cluster level rather than at group level. However, a decrease in the heterogeneity displayed among the 15 EU countries is noticeable, especially towards the end of the 1990s

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