How integrated are the money market and the bank loans market within the European Union?

This paper estimates cointegration vectors of the time series of money market interest rates and bank lending rates. The study includes six member countries of the European Union (EU) and covers a period of 10 years, from 1985 to 1994. During this period, significant steps were taken that intensified financial integration in the EU, including the free flow of capital, a system of stable exchange-rate parities and the implementation of a single market for banking services. We conclude that the domestic money markets are closely linked, but the domestic banking markets are segmented. Preliminary investigation of international differences in the capital structure of firms, on the one hand, and of domestic business cycle conditions, on the other hand, do not seem to explain differences in bank spreads across countries. The results point to other directions, presumably to local market power and to differences in the role of lender monitoring. (C) 1999 Published by Elsevier Science Ltd. All rights reserved.