European banking regulation has been harmonized to a high degree over the last few decades. Nevertheless, the European banking industry remains fragmented as shown by the relatively high market shares of banks in their home countries. In this paper we concentrate on the integration process of European bank share prices. We develop a parsimonious model that is able to detect different integration (correlation) regimes. The model is applied to a set of 41 European banks that have a continuous share price listing over the period January 1990 – March 2003. Our main finding is that the correlation between larger banks in Europe has increased substantially over this period, whereas the correlation between smaller banks has become lower. A reason for this result could be that investors perceive that the activities of bigger banks get more integrated. Another reason may be that as a result of institutional and other larger investors turning their investment strategies towards a European sector-based approach, investors are tracking indices of the European banking sector. These indices are typically constructed from the stock prices of the larger banks. This would create an incentive for large banks to become more integrated with other large banks.

European banks, bank integration, bank risk, equity market integration, regime-switching
International Financial Markets (jel G15), Corporate Finance and Governance (jel G3), Business Administration and Business Economics; Marketing; Accounting (jel M)
hdl.handle.net/1765/1834
ERIM Report Series Research in Management
Erasmus Research Institute of Management

Moerman, G.A, Mahieu, R.J, & Koedijk, C.G. (2004). Financial Integration Through Benchmarks: The European Banking Sector (No. ERS-2004-110-F&A). ERIM Report Series Research in Management. Retrieved from http://hdl.handle.net/1765/1834