Bank competition and the transmission of unconventional monetary policy in the euro area

Abstract:

We analyse the relation between bank competition and the transmission of unconventional monetary policy (UMP) for 14 European countries. We estimate an error-correction model to analyse the relation between the pass-through of UMP to long-term commercial interest rates and the level of competitiveness. We estimate this model for three different measures: the Herfindahl Index (HHI), the Boone indicator and the H-statistic. Our results indicate that bank concentration as measured by the HHI is not a good proxy of competitive conditions in the market, whereas the other two measures are more meaningful in this context. The pass-through of UMP is increasing in the degree of bank competition as measured by the Boone indicator and the H-statistic. The relationship between pass-through and the level of market concentration is less well defined, suggesting that competition and market concentration do not go hand in hand in the banking sector.