Twenty years with the Euro: Eurozone banking market integration revisited

Abstract

Banking market integration is essential for a stable European Monetary Union but was severely disrupted during the Eurozone crisis. With heterogeneous national banking markets, interpreting the recent post-crisis convergence of national interest rates as restored integration has been challenged in the literature. We therefore scrutinize integration under the condition of market heterogeneity for 12 Eurozone countries before, during and after the Eurozone crisis from 2003 to 2019, employing a novel combination of state-of-the-art network analyses and estimates of bilateral interest rate linkages. We measure integration as bi-directional (Granger) causality relations between lending rates or margins in order to identify crisis-resilient arbitrage mechanisms. Their extent, disruption and restoration inform our subsequent network analysis, which unveils that the Eurozone crisis has fundamentally and persistently disrupted this network beyond the crisis period even when interest rates and margins are converging. Our approach complements and extends existing integration analyses by revealing policy-relevant but otherwise undetected disintegration.