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Rughoo, Aarti and Sarantis, Nicholas (2009) Integration in the European retail banking sector : evidence from deposit and lending rates. Centre for International Capital Markets discussion papers, 2009 (06). pp. 1-47. ISSN 1749-3412
The motivation of this paper is to examine whether any integration has taken place within the European Union retail banking sector during 1991-2008. An important contribution of our study is the application of methodologies which have not been hitherto employed in this area. First, we test for structural breaks in the deposit and lending rates and apply cointegration tests to both the original and demeaned time series. Second, we apply panel unit root tests that allow for structural breaks. In addition, we investigate both the 1990s and the more recent period, 2003-2008, thus providing a comparison between the new millenium and the 1990s. The stochastic structural break tests have revealed the presence of mostly 3 breaks during the 1991-2002 period and 2 breaks during the 2003-2008 period in both the deposit and lending rates, with the break dates closely clustered for most countries. The results on integration depend crucially on the methodology and data employed. Overall, the evidence points towards an integrated European retail banking sector, provided that we allow for structural breaks in the deposit and lending rates and employ panel tests that have more power than the time series tests.
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