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European Banking Integration under a Quadratic Loss Function

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  • Mamatzakis, E
  • Koutsomanoli, A

Abstract

European banking markets have become increasingly integrated in recent years, but barriers to full integration, especially in retail banking, still remain. This paper covers a gap in the literature by providing a first insight into the process of financial integration in the European Union (EU) in terms of convergence in the speed of adjustment of cost inefficiency to equilibrium level. We employ a quadratic loss function specification based on forward-looking rational expectations to model the underlying dynamics of efficiency scores in the banking industry of the EU-15 region over the period 1998-2005. Results show that there is considerable variation in the speed of adjustment across banking systems, while over time it also appears that continuing efforts to advance financial integration have not as yet led to an improvement in the speed of adjustment to the long run equilibrium.

Suggested Citation

  • Mamatzakis, E & Koutsomanoli, A, 2009. "European Banking Integration under a Quadratic Loss Function," MPRA Paper 19379, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:19379
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    References listed on IDEAS

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    More about this item

    Keywords

    Speed of adjustment; rational expectations; cost inefficiency;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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