A Factor Analysis Approach to Measuring European Loan and Bond Market Integration

Abstract

By using an existing and a new convergence measure, this paper assesses whether bank loan and bond interest rates are converging for the corporate sector across the euro area. Our sample of 828 bond issues suggests that integration of the primary euro-denominated bond market is complete; there is evidence of α -convergence, β -convergence, strong factor convergence, and absence of σ -convergence. In contrast, the market for bank loans remains segmented albeit at various degrees depending on the type and size of the loan. Factor analysis reveals that rates on large loans and long-term small loans have weakly converged in the sense that, up to a fixed effect, their evolution is driven by common factors only. In contrast, the evolution of short-term small loan rates is still affected by country-specific dynamic factors. These working capital type of loans are more susceptible to information problems and, therefore, possibly to distortions in loan pricing. There are few signs that bank loan rates are becoming more uniform with time.