Competition lowers bank-market spreads on loans

Banks price their loans more in line with the market interest rate in countries with stronger loan market competition, says a new paper from the Bank of Spain.

The paper analyses the interest rates applied by euro-area banks to loans and deposits during the 1994-2004 period. The authors also find that competitive pressure is heavier in the loan market than in the deposit market as banks compensate for their reduction in loan market income by lowering their deposit rates.

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