Integration in European Retail Banking : Evidence from savings and lending rates to the household sector

The aim of this paper is to examine the integration process within the European Union retail banking sector during the period 1991-2008 by analysing deposit and lending rates to households. An important contribution of the paper is the application of the recently developed Phillips and Sul (2007a) panel convergence methodology which has not hitherto been employed in this area. This method analyses the degree as well as the speed of convergence, identifies the presence of club formation, and measures the behaviour of each country’s transition path relative to the panel average. We find evidence supporting integration in the deposit and short-term mortgage markets but not in the consumer credit market and longer term mortgages. The club clustering tests suggest that the convergence process is not homogeneous among countries. In addition, it is observed that the speed of convergence is inversely related to the maturity duration for all deposit and lending rates.