Competition in banks’ lending business and its interference with ECB monetary policy

► Our paper analyses the national levels of competition in EMU banking systems. ► We develop a modified Lerner Index as an improved measure of banking competition. ► Market power in the lending segment is greater than in total banking business. ► Changes in banking competition affect corporate fundi...

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Bibliographic Details
Published in:Journal of international financial markets, institutions & money institutions & money, 2013-07, Vol.25, p.144-162
Main Authors: Brämer, Patrick, Gischer, Horst, Richter, Toni, Weiß, Mirko
Format: Article
Language:English
Subjects:
Banking
Banking competition
Banking system
Central banks
Competition
Competition between banks
Eastern Europe
Economic models
Economic theory
European Central Bank
European Monetary Union
Financial services
Lerner Index
Market power
Monetary policy
Regression analysis
Studies
Western Europe
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Summary:► Our paper analyses the national levels of competition in EMU banking systems. ► We develop a modified Lerner Index as an improved measure of banking competition. ► Market power in the lending segment is greater than in total banking business. ► Changes in banking competition affect corporate funding conditions heterogeneously. ► National changes in banking competition interfere with ECB monetary policy. Our paper calls attention to the heterogeneous levels of competition in EMU banking systems. Employing a modified Lerner Index, our methodically unique data set enables us to calculate banks’ pricing power in the national lending business alone, instead of measuring market power for banks’ total business. We document that market power in the exclusive segment of lending is greater than market power in total banking business. In an OLS regression model for the period 2003–2009, we find that changes in competition considerably affect funding conditions in the individual countries and therefore interfere with a homogeneous transmission of ECB monetary policy.
ISSN:1042-4431
1873-0612
DOI:10.1016/j.intfin.2013.01.009