Bank competition and the transmission of unconventional monetary policy in the euro area

Abstract

We analyse the relation between bank competition and the transmission of unconventional monetary policy (UMP) for 14 European countries. We estimate an error-correction model to analyse the relation between the passthrough of UMP to long-term commercial interest rates and the level of competitiveness. We estimate this model for three different measures: the Herfindahl Index (HHI), the Boone indicator and the H-statistic. Our results indicate that bank concentration as measured by the HHI is not a good proxy of competitive conditions in the market, whereas the other two measures are more meaningful in this context. The pass-through of UMP is increasing in the degree of bank competition as measured by the Boone indicator and the H-statistic. The relationship between pass-through and the level of market concentration is less well defined, suggesting that competition and market concentration do not go hand in hand in the banking sector.

Competitiveness in the European Consolidated Banking Sector After the 2008 Financial Crisis

“…Palečková (2018) used a combination of both concentration ratios and the HHI indexstructural measures. Casu and Girardone (2006), Baarsma and Vooren (2018), and Fungáčová, Shamshur, and Weill (2017) combined both structural and non-structural concentration measures to analyse the level of competition in the European banking sector. Lolos, S., Hondroyinnis, G., 1999. In addition to the structural measures, this paper will also use the H-statistics, developed by Panzar and Rosse (1987), which has been widely used to measure competition in the banking sector due to its broad applicability and ease of estimation.…”