Abstract
Consolidation in euro area banking has been the major trend post-crisis. Has it been accompanied by more or less competition? Has it led to more or less credit risk? In all or some countries? In this study, we examine the evolution of competition (through market power and concentration) and credit risk (through non-performing loans) in 2005–2017 across all euro area countries (EA-19), as well as core (EA-Co) and periphery (EA-Pe) countries separately. Using Theil inequality and convergence analysis, our results support the continued existence of fragmentation as well as of divergence within and/or between core and periphery with respect to competition and credit risk, especially post-crisis, in spite of some partial reintegration trends. Policy measures supporting faster convergence of our variables would be helpful in establishing a real banking union.
Highlights
Financial integration has been one of the major goals of the European Union (EU) because of its significant capability to offer more opportunities for risk sharing, better allocation of capital, and higher economic growth (Baele et al 2004)
Risk Financial Manag. 2020, 13, 57 currency and a single bank supervisory mechanism, a possible bias that might stem from the use of either heterogeneous data or data coming from only a subset of euro area countries was eliminated
We examined the evolution of competition and credit risk across euro area core (EA-Co), periphery (EA-Pe) and all 19 countries (EA-19) in the period 2005–2017, as well as in two sub-periods, 2008–2012 and 2013–2017
Summary
Financial integration has been one of the major goals of the European Union (EU) because of its significant capability to offer more opportunities for risk sharing, better allocation of capital, and higher economic growth (Baele et al 2004). We test the hypothesis of the existence of fragmentation in the euro area (EA) as a whole (EA-19 group—19 countries of the Euro Area from 1 January, 2015), as well as in core countries (EA-Co group) and periphery countries (EA-Pe group), with respect to bank competition (through market power and concentration) and credit risk over the period 2005–2017. A second hypothesis, which is tested in this study, refers to the presence of β-convergence and σ-convergence among the country-members of each group, with respect to bank competition, bank concentration, and credit risk. It should be noted, that a possible convergence of the variables under examination is only a necessary but not a sufficient condition for the achievement of financial integration in the euro area.
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