Banking Integration Research Articles

Banking Market Integration in the SADC Countries: Evidence from Interest Rate Analyses

This paper investigates the state, development and drivers of banking market integration in the member countries of the Southern African Development Community (SADC) by employing interest rate data. We first conduct a principal component analysis and find evidence for both increasing monetary integration and banking integration in loan and deposit markets. These integration processes are not developing uniformly and we can identify a convergence club. As banking market integration can be a genuine process or simply be driven by monetary integration, we also investigate the interest rate pass through from national and South African Central bank interest rates onto national retail rates. With respect to the convergence club we find both, genuine and monetary-integration driven processes though the latter dominate. We conclude that a selective expansion of the Common Monetary Area is possible but needs to be complement by efficient financial development policies.

Bank Integration and Financial Constraints: Evidence from U.S. Firms

This paper uses data on publicly-traded firms in the U.S. to analyze the effect of interstate bank integration on the financial constraints borrowers face. A firm-level investment equation is estimated in order to test if bank integration reduces the sensitivity of capital expenditures to the level of internal funds. The staggered deregulation of cross-state bank acquisitions that took place in the U.S. between 1978 and 1994 helps estimate the model. Integration decreases financing constraints for bank-dependent firms. The change in firms' access to external finance is explained by an increase in the share of locally headquartered geographically diversified banks.

Integration in Euro Area Retail Banking Markets - Convergence of Credit Interest Rates

Since the introduction of the single currency in 1999, major progress has been made towards achieving an integrated European capital and financial market. Available evidence suggests, nevertheless, that the degree of integration varies greatly depending on market segment. Retail banking markets are generally seen to be much less integrated than other segments of financial markets. Most consumers still buy retail financial services from domestic suppliers, cross-border entry of financial services firms is rare - even if it is growing - and the range of products available or terms attached thereto differ substantially across euro area countries. The purpose of this paper is to assess integration of retail banking in the euro area from January 2003 to December 2006. The empirical analysis is based on a monthly panel of recently published harmonised interest rates from euro area monetary financial institutions. We estimate two commonly used measures of convergence, namely β- and σ-convergence, to assess the speed and degree of integration. Tests for convergence are based on a panel unit root test. The tests provide evidence of a process of convergence in retail banking credit interest rates for households and non-financial corporations and show this convergence has recently being continuing. Thus, even if there are substantial cross-country differences in interest rate levels, progress towards integration is observable.

Bank Integration and Financial Constraints: Evidence from U.S. Firms

This paper uses data on publicly-traded firms in the U.S. to analyze the effect of interstate bank integration on the financial constraints borrowers face. A firm-level investment equation is estimated in order to test if bank integration reduces the sensitivity of capital expenditures to the level of internal funds. The staggered deregulation of cross-state bank acquisitions that took place in the U.S. between 1978 and 1994 helps estimate the model. Integration decreases financing constraints for bank-dependent firms. The change in firms' access to external finance is explained by an increase in the share of locally headquartered geographically diversified banks.

The Determinants of International Financial Integration Revisited: The Role of Networks and Geographic Neutrality

Over the last two decades, the degree of international financial integration has increased substantially, becoming an important area of research for many financial economists. This working paper explores the determinants of the asymmetries in the international integration of banking systems. We consider an approach based on both network analysis and the concept of geographic neutrality. Our analysis focuses on the banking systems of 18 advanced economies between 1999 and 2005. Results indicate that banking integration should be assessed from the perspective of both inflows and outflows, given that they show different patterns for different countries. Using standard techniques, our results reinforce previous findings by the literature-especially the remarkable role of both geographic distance and trade integration. Nonparametric techniques reveal that the effect of the covariates on banking integration is not constant over the conditional distribution, which (in practical terms) implies that the sign of the relationship varies across countries.

What are Borders Made of? An Analysis of Barriers to European Banking Integration

Linguistic and cultural differences, different legal and supervisory frameworks, and relationship lending have been repeatedly mentioned as barriers to European retail banking integration. We investigate whether these barriers have affected integration within national boundaries, using an index of localism of regional banking systems as a measure of market integration. If local banks are established and flourish because asymmetric information makes entry difficult for non-incumbents (Dell'Ariccia, 2001) or regulatory and governance rules prevent entry from outside (Berger et al., 1995), we should find a significant relationship between indicators of these barriers and measures of the localism of banking systems. Our results show that this is indeed the case for asymmetric information, while findings are more blurred for supervisory practices.

A Test of the Law of One Price in Retail Banking

This paper investigates the level and the determinants of retail banking interest rate differences among Spanish banks in the period 1989–2003. We find that the interest rates of twenty five different bank loan and deposit products adjust rather rapidly to their long‐term values in response to external shocks, as the relative version of the Law of One Price predicts, but the evidence runs contrary to the absolute version of the Law. Credit risk premium, part of the marginal cost of the loans granted by a particular bank, is an important source of interest rate dispersion across banks and loan products, both before and after Spain joined the Euro zone. Therefore, differences in credit risk policies across banks must be taken into account when forming expectations about European retail banking integration.

Limits to International Banking Consolidation

Heterogenous banking supervision and regulation is often considered as the most important impediment for Pan-European Bank mergers. In this paper we identify other more fundamental reasons for a limited degree of cross-country integration in retail banking. We argue that the distribution of regional liquidity shocks may pose a natural limit to the extent of cross-border bank mergers. The paper derives the impact of different underlying stochastic structures on the optimal structure of cross regional bank mergers. Imposing a symmetry restriction on the underlying stochastic structure of liquidity shocks we find that benefits from diversification and the costs of contagion may be optimally traded off if banks from some but not from all regions merge. Under an additional monotonicity assumption full integration is only desirable if the number of regions with diverse risks is sufficiently large.

Are the New and Old EU Countries Financially Integrated?

During the last four years, the eight Eastern European countries that joined the EU in 2004 have made significant strides toward financial integration with the EU. Several pieces of evidence support this finding. First, yields on long‐term sovereign bonds in accession countries have converged towards EU levels. This is true for both bonds denominated in local currency and bonds denominated in euro. Secondly, while the issuance of euro‐denominated corporate bonds from accession countries is limited, yields on existing corporate bonds are in line with those in the old EU countries. Thirdly, margins in the banking sector have narrowed, which is consistent with the integration of banking markets. Finally, while country effects still play a more important role in explaining stock returns than industry effects, the continuing stock market rally in the region is consistent with financial integration into the EU.

Limits to International Banking Consolidation

Heterogenous banking supervision and regulation is often considered as the most important impediment for Pan-European Bank mergers. In this paper we identify other more fundamental reasons for a limited degree of cross-country integration in retail banking. We argue that the distribution of regional liquidity shocks may pose a natural limit to the extent of cross-border bank mergers. The paper derives the impact of different underlying stochastic structures on the optimal structure of cross regional bank mergers. Imposing a symmetry restriction on the underlying stochastic structure of liquidity shocks we find that benefits from diversification and the costs of contagion may be optimally traded off if banks from some but not from all regions merge. Under an additional monotonicity assumption full integration is only desirable if the number of regions with diverse risks is sufficiently large.

Banking Sector Integration and Competition in Cemac

This paper considers the extent of retail banking integration in the Communaute Economique et Monetaire d'Afrique Centrale (CEMAC) and the level of bank competition at the regional level. Using a mix of quantitative and qualitative indicators, the paper finds some evidence of price convergence in average interest rate spreads. However, this observed fact is not supported by an increase in cross-border flows in retail loans and deposits, and price convergence may merely reflect excess liquidity in the region. Other data also indicate that bank competition within the CEMAC as a region is limited, complementing the findings on integration. Addressing shortfalls in legal and regulatory frameworks, infrastructure, and markets would facilitate integration.

Banking Sector Integration and Competition in CEMAC

This paper considers the extent of retail banking integration in the Communaute Economique et Monetaire d'Afrique Centrale (CEMAC) and the level of bank competition at the regional level. Using a mix of quantitative and qualitative indicators, the paper finds some evidence of price convergence in average interest rate spreads. However, this observed fact is not supported by an increase in cross-border flows in retail loans and deposits, and price convergence may merely reflect excess liquidity in the region. Other data also indicate that bank competition within the CEMAC as a region is limited, complementing the findings on integration. Addressing shortfalls in legal and regulatory frameworks, infrastructure, and markets would facilitate integration.

Firm Volatility and Banks: Evidence from U.S. Banking Deregulation

This paper exploits the staggered timing of state-level banking deregulation in the United States during the 1980s to study the causal effect of banking integration on the volatility of non-financial corporations. We find that firm-level employment, production, sales, and cash flows are less volatile after interstate banking deregulation, particularly for firms that have limited access to external finance. This finding suggests that bank-dependent firms exploit wider access to finance after deregulation to smooth out idiosyncratic shocks. In fact, short-term credit becomes less pro-cyclical after out-of-state bank entry is permitted. Finally, lower volatility in real-side variables after deregulation translates into lower idiosyncratic risk in stock returns.

Convergence in the activities of European banks

Cross-country integration of banking in Europe typically has been analyzed from the perspective of particular markets for financial products. We extend this research to consider the potential effects of market integration on the portfolio choices and financial structure of banks in seven European countries, 1994–2002. Our evidence rejects a hypothesis that banks in different countries have common activities. Distinct portfolio choices are more evident among small banks, as opposed to big banks, are more evident in Italy and are less evident in the UK and Spain. We conclude that integration of financial markets in Europe, to the extent that it has occurred, has not imposed a uniform mix of activities on European banks.

A strategic review of operations and marketing functions in retail banks

PurposeAims to examine the performance affects of strategic integration in retail banking services.Design/methodology/approachUsing a survey of retail banking executives, it is examined as to how the role of operations and marketing areas can assist retail banks to shape their competitive strategies.FindingsIt is found that proactiveness and competitive strategy substantially affect a retail bank's performance based on the strength of integration of operations and marketing areas.Research limitations/implicationsResearch is limited to retail banking services.Originality/valueThe research broadens the scope of the strategic fit concept towards the analysis of performance effects due to functional integration in retail banks.

Banking Relationships and Access to Equity Capital Markets: Evidence from Japan's Main Bank System

We provide evidence that bears on the impact of deregulation that removes impediments to integration of investment banking and commercial banking functions. At issue is whether close relationships between commercial banks and investment banks give rise to conflicts of interest and enhanced bargaining power, or whether relationships enhance information production and dissemination. In particular, we are interested in whether close relationships increase capital market access for smaller, lesser-known firms. We approach these questions with a research design that purposefully generates a high likelihood of finding evidence of conflicts. In contrast to previous studies that examine debt or seasoned equity securities, we examine IPOs, which arguably are more information-intensive and subject to more severe conflict of interest problems. We use a sample of 484 Japanese IPOs over a time period characterized by extreme financial market distress. When firms in Japan go public, they can engage an investment banker who is related through a common main bank, or can select an alternative investment banker. The main bank relationship can be an efficient way for the investment bank to acquire information generated, but may give rise to conflicts. We use data from two different investment banking regimes in Japan (a hybrid auction-method regime and a book-building regime) to test the effects of main bank relationships on access to Japan's equity capital market, issue costs, and aftermarket performance. We find that main banking relationships give small issuers increased access to equity capital markets, but that issuers of large IPOs switch to non-related investment banks that are capable of managing large offerings. While we find evidence that investment banks seek to exploit bargaining power with related issuers, we also find that issuers respond to expected high issue cost by switching to non-related investment banks. The net result is that total issue costs through related and non-related investment banks are similar. With respect to aftermarket performance and use of offer proceeds, we find no evidence of conflict of interest or self-dealing for either the main bank or the investment bank.

The CAP cancer protocols--a case study of caCORE based data standards implementation to integrate with the Cancer Biomedical Informatics Grid.

BackgroundThe Cancer Biomedical Informatics Grid (caBIG™) is a network of individuals and institutions, creating a world wide web of cancer research. An important aspect of this informatics effort is the development of consistent practices for data standards development, using a multi-tier approach that facilitates semantic interoperability of systems. The semantic tiers include (1) information models, (2) common data elements, and (3) controlled terminologies and ontologies. The College of American Pathologists (CAP) cancer protocols and checklists are an important reporting standard in pathology, for which no complete electronic data standard is currently available.MethodsIn this manuscript, we provide a case study of Cancer Common Ontologic Representation Environment (caCORE) data standard implementation of the CAP cancer protocols and checklists model – an existing and complex paper based standard. We illustrate the basic principles, goals and methodology for developing caBIG™ models.ResultsUsing this example, we describe the process required to develop the model, the technologies and data standards on which the process and models are based, and the results of the modeling effort. We address difficulties we encountered and modifications to caCORE that will address these problems. In addition, we describe four ongoing development projects that will use the emerging CAP data standards to achieve integration of tissue banking and laboratory information systems.ConclusionThe CAP cancer checklists can be used as the basis for an electronic data standard in pathology using the caBIG™ semantic modeling methodology.

Regional versus global integration of euro-zone retail banking markets: Understanding the recent evidence from price-based integration measures

We investigate the integration of euro-zone retail banking markets by comparing convergence and cointegration measures. As an innovation to the literature convergence measures are exposed to a difference-in-differences methodology which allows both, identifying the impact of the single currency and benchmarking euro zone-specific from global integration effects. We find that euro-zone convergence has largely been a result of integrating wholesale markets after the elimination of exchange rate risks. After 1999 integration is mainly observed for a restricted “convergence club” excluding Germany, Ireland and Belgium. Moreover, convergence is at least partly a global rather than euro zone-specific process.

Regional Profit Rates of National Banks and the Development of the U.S. Financial Market, 1870-1914

Lance Davis, Richard Sylla, and John James have argued that competitive forces in U.S. banking changed in the period after 1885 and this influenced loan rates charged to bank customers. Davis's original research and others that followed largely depended on interest rates as indicators of the integration of banking markets. But as Larry Neal has argued, measuring capital market integration based on interest rates on loans is complicated by factors such as local regulations, risk and duration of loans, and monopoly rents. To investigate the Davis-Sylla-James (DSJ) hypothesis, I therefore examine regional profit rates of national banks, which are more relevant to the industrial dynamics of banking. I apply both time-series and regression techniques, and find support for the DSJ hypothesis: regional profit rate differentials were large in the 1870-1884 period, but fell substantially after 1884. I also examine the relation between profit premia and financial risk and find that differences in financial risk can completely explain away profit premia for the 1885-1899 period but not for the 1870-1884 and 1900-1915 periods. This is somewhat consistent with the DSJ hypothesis, which implies that extraordinary profits existed in the 1870-1884 period but disappeared afterwards. Why a risk premium reappeared in the 1900-1914 period, however, is a puzzle. I argue that it may have been due to easing of entry barriers for national banks in 1900 that allowed a flood of new, smaller banks that, by historical standards, had low capitalization rates. By comparison with the previous period, banks in the 1900-14 period were more financially fragile and so commanded a higher risk premium. If this interpretation is correct, then the pattern of development of banking in the U.S. from 1863 to 1914 is one of a relatively mature industry responding to economic expansion and competitive forces but punctuated by exogenous regulatory changes that influenced interest rates, profits, and financial risk.

European Banking Integration: Don’t Put the Cart before the Horse

This paper reviews the progress in European banking integration over the last twenty years, and evaluates the current system of banking supervision and deposit insurance based on ‘home country’ control. The public policy implications to draw from the paper are threefold: First, after a relatively slow start, European banking integration is gaining momentum, in terms of cross‐border flows, market share of foreign banks in several domestic markets, and cross‐border M&As of significant size. If this trend continues, the issue of adequate supervision and safety nets in an integrated European banking market will become even more pressing. Second, although until recently banks have relied mostly on subsidiary structures to go cross‐border, this is changing with the recent creation of the European company statute, which facilitates cross‐border branch banking. A review of the case of the Scandinavian bank, Nordea Bank AB, helps to understand some remaining barriers to integration, and the supervisory issues raised by branch banking. Third, it is argued that the principle of ‘home country’ supervision is unlikely to be adequate in the future for large international banks. Because the closure of an international bank would be likely to have cross‐border spillovers, and because some small European countries might be unable to finance the bail‐out of their very large banks, centralization, or at least Europe‐wide coordination, of the decision to close or bail‐out international banks is needed. This raises the issue of European funding of bail‐out costs, European banking supervision, and European deposit insurance.