This study provides new evidence on the emergence of a single eurozone retail banking market with particular reference to consumer credit. Given the heterogeneous nature of consumer credit products in the eurozone, the authors reject the earlier proposition of the Cecchini study, which equates banking market integration with identical interest rates throughout the eurozone. The present study advocates the use of the co-integration methodology, which allows us to investigate integration in the presence of country-specific credit rates. The empirical results indicate only very limited evidence of an integrated retail banking market prior to 1 January 1999, pointing to the limited effectiveness of the single market cum Second Banking Directive in particular in integrating consumer credit markets.
The relationship of national lending markets with the remaining eurozone lending markets, however, exhibits strong signs of structural changes that have come along with the introduction of the single currency. Regarding this period under monetary union, the results provide a first picture of an emerging uniform eurozone banking market. This tendency is more pronounced for the corporate lending market, while consumer lending markets are still more fragmented. The study identifies three possible driving forces of this integration process: cross-border borrowing and lending (arbitrage), a competitive national and international retail banking environment, and a smooth and uniform passthrough of interest rate changes onto lending rates. While the extent of cross-border retail banking is still very limited and interest rate pass-through is working most efficiently and uniformly in the more competitive corporate lending market, the authors conclude that the single currency has the potential to “complete” the single market in a very special sense. It is not so much cross-border arbitrage that has so far produced the “statistical signs” of an uniform retail banking market, but a smooth and uniform passthrough of interest rate changes induced by the single monetary policy. The lack of evidence of integration in consumer credit so far therefore also points to the relevance of competition policy for creating a uniform consumer credit market in the eurozone.