TAILIEUCHUNG - Temi di discussione: An empirical analysis of national differences in the retail bank interest rates of the euro area

We divide our analysis into three steps. In the first step, we make an unconditional test of the cross country equality of interest rates, using two different econometric methods. In the other steps, we continue to use only one of two methods allowing for the effect of the main determinants of bank interest rates. If rates are different, but the difference is due to economic factors, it should disappear once we control for these factors. In our estimations we include the main determinants of bank interest rates, both “demand side” characteristics (second step) and “supply side” characteristics (third step). The issues in the extensive literature on bank interest rates are a second field of economic research related to this work. . | BANC A D ITALIA Temi di discussione del Servizio Studi An empirical analysis of national differences in the retail bank interest rates of the euro area by M. Affinito and F. Farabullini Number 589 - May 2006 The purpose of the Temi di discussione series is to promote the circulation of working papers prepared within the Bank of Italy or presented in Bank seminars by outside economists with the aim of stimulating comments and suggestions. The views expressed in the articles are those of the authors and do not involve the responsibility of the Bank. Editorial Board Giorgio Gobbi Marcello Bofondi Michele Caivano Stefano Iezzi Andrea Lamorgese Marcello Pericoli Massimo Sbracia Alessandro Secchi Pietro Tommasino. Editorial Assistants Roberto Marano Alessandra Piccinini. AN EMPIRICAL ANALYSIS OF NATIONAL DIFFERENCES IN THE RETAIL BANK INTEREST RATES OF THE EURO AREA by Massimiliano Affinito and Fabio Farabullini Abstract The availability of new harmonized data on bank interest rates allows a rigorous assessment to be made of cross-country price homogeneity heterogeneity in euro area retail credit markets. Econometric analysis shows that the banking market is still highly segmented and that the degree of integration in a single country Italy taken as a benchmark for integration is greater than in the euro area. However national differences can be partially explained by variables reflecting the characteristics of domestic depositors and borrowers demand side regressors such as risk exposure disposable income alternative financing sources average firm size and the characteristics of the banking systems supply side regressors such as banking market concentration asset and liability structure . The euro area prices appear different because national banking products appear different or because they are differentiated by national factors. Once these factors have been controlled for many differences disappear. JEL classification E43 E44 G21. Keywords bank interest rates .

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