Regional loan market structure, bank lending rates and monetary transmission Discussion paper 30/2025: Sebastian Bredl

The concentration of the banking market is potentially a significant factor influencing lending rates. New research suggests that concentration on the regional level may impact the level of lending rates within the euro area. However, its relevance appears to be limited when it comes to the transmission of monetary policy.

Does the regional concentration of the banking market influence the transmission of monetary policy? A potential mechanism involves banks’ market power, which may shape the pass-through from market rates to lending rates (Heckmann-Draisbach and Hardt, 2024). This pass-through is a crucial component of the monetary policy transmission process. However, there is still limited evidence on the significance of regional market concentration for monetary policy transmission in the euro area. This study, conducted as part of the Champ Research Network, suggests that regional market concentration played only a minor role during the monetary policy tightening phase of 2022 and 2023.

Using loan-level data to assess regional market concentration

Regional banking market concentration is potentially more relevant than national-level concentration. Research has shown that national concentration is a poor proxy for banks' market power (Berger, Demirgüç-Kunt, Levine and Haubrich (2004), Claessens and Laeven (2004)). Concentration on the regional level might be more relevant, as many banks tend to operate on a regional rather than a national scale. However, calculating measures of regional market concentration requires detailed data on the regional distribution of banks’ assets. The AnaCredit dataset offers this level of detail for loans to non-financial corporations. 

If greater market concentration indicates higher market power, one would expect banks in more concentrated regional markets to charge higher lending rates. This study leverages AnaCredit data to examine whether this hypothesis holds true. It employs the regional Herfindahl-Hirschman Index (HHI) to measure overall market concentration, while using bank-specific regional market shares as a measure of concentration at the bank level. The findings suggest, albeit tentatively, that higher regional market shares are linked to higher lending rates for loans to micro and small non-financial corporations (NFCs). This indicates that greater regional market shares provide banks with market power, enabling them to charge higher lending rates. Nevertheless, the empirical evidence is not robust to changes in the empirical specification.  

Regional market structure: limited relevance for monetary policy transmission 

In a subsequent step, the study reveals that the transmission of the monetary policy tightening in 2022 and 2023 to lending rates was not significantly influenced by regional market concentration. Figure 1 illustrates the relationship between regional market shares and the responsiveness of lending rates to monetary policy surprises. These surprises are measured by the immediate reactions of market rates to the announcement of monetary policy decisions by the ECB Governing Council (Altavilla, Brugnolini, Gürkaynak, Motto and Ragusa (2019)). The lending rates of banks with high regional market shares did not systematically respond differently to monetary policy surprises compared to those of banks with low market shares. As shown in Figure 1, this observation holds true for high regional market shares with both high and low overall concentration levels, as measured by the Herfindahl-Hirschman Index (HHI). 

Relative responses of lending rates to a monetary policy surprise

Figure 1: Relative responses of lending rates for banks with high regional market shares to a monetary policy surprise. 

It remains unclear what disrupts the link between banking market concentration and the strength of monetary policy transmission. The results do not provide conclusive evidence on whether higher regional concentration provides banks with market power that can be used to charge higher lending rates. Consequently, it is uncertain whether regional market concentration is simply a poor indicator of bank market power, or whether the market power associated with higher concentration has no meaningful impact on the pass-through from monetary policy measures to lending rates. From a monetary policy perspective, however, it is reassuring to note that market concentration does not appear to have a strong influence on monetary policy transmission in either case. 

References

Altavilla, C., L. Brugnolini, R.Gürkaynak, R. Motto and G. Ragusa (2019): Measuring euro area monetary policy, Journal of Monetary Economics 108, 162‑179. 

Berger, A. N., A. Demirgüç-Kunt, R. Levine and J. L. Haubrich (2004): Bank Concentration and Competition: An Evolution in the Making, Journal of Money, Credit and Banking 36 (3, Part 2), 433‑451.

Claessens, S. and L. Laeven (2004): What Drives Bank Competition? Some International Evidence, Journal of Money, Credit and Banking 36 (3, Part 2), 563‑583.

Heckmann-Draisbach L. and J. Hardt (2024): Hampered monetary policy transmission – A supply side story? Journal of Money, Credit and Banking, forthcoming.

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