Competition in banks’ lending business and its interference with ECB monetary policy

Our paper calls attention to the heterogeneous levels of competition in EMU banking systems. Employing a modified Lerner Index, our methodically unique data set enables us to calculate banks’ pricing power in the national lending business alone, instead of measuring market power for banks’ total business. We document that market power in the exclusive segment of lending is greater than market power in total banking business. In an OLS regression model for the period 2003–2009, we find that changes in competition considerably affect funding conditions in the individual countries and therefore interfere with a homogeneous transmission of ECB monetary policy.

► Our paper analyses the national levels of competition in EMU banking systems.
► We develop a modified Lerner Index as an improved measure of banking competition.
► Market power in the lending segment is greater than in total banking business.
► Changes in banking competition affect corporate funding conditions heterogeneously.
► National changes in banking competition interfere with ECB monetary policy.