European Banking Integration under a Quadratic Loss Function

Emmanuel Mamatzakis and A Koutsomanoli

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Speed of adjustment; rational expectations; cost inefficiency (search for similar items in EconPapers)
JEL-codes: D21 G21 (search for similar items in EconPapers)
Date: 2009-09
New Economics Papers: this item is included in nep-ban and nep-eec
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:19379

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