The Impact of Banking Competition on Interest Rates for Household Consumption Loans in the Euro Area

TL;DR

This study examines how banking competition influences household loan interest rates in the Euro Area, revealing that increased competition slightly raises borrowing costs and highlighting key macroeconomic factors affecting rates.

Contribution

It provides new empirical evidence on the relationship between local banking competition and household interest rates in the Euro Area using robust panel data methods.

Findings

Higher banking competition slightly increases loan interest rates.

ECB interest rate and country risk significantly impact interest rates.

Euro appreciation influences borrowing costs.

Abstract

This paper investigates the impact of banking competition on interest rates for household consumption loans in the Euro Area from 2014 to 2020. Utilizing a panel data regression approach, we analyze how various factors, including local banking competition, influence the interest rates set by banks across 13 Euro-area countries. Our key independent variable, local banking competition, is measured by the number of commercial bank branches per 100,000 adults. Control variables include the ECB interest rate, euro exchange rate, real GDP growth rate, inflation rate, unemployment rate, bank business volumes, and country risk. We address potential endogeneity and heterogeneity biases and employ both Fixed Effects and Hausman-Taylor models to ensure robust results. Our findings indicate that higher local banking competition is associated with a slight increase in interest rates for household loans. Additionally, factors such as ECB interest rate, country risk, and euro appreciation significantly affect interest rates. The results offer insights into how competitive dynamics in the banking sector influence borrowing costs for households, providing valuable implications for policymakers and financial institutions in the Euro Area.