Financial Integration in Europe: Should the United Kingdom Banking Market Formally Integrate?

Abstract

The segmentation of European banking markets illustrates the strength and influence of both the United Kingdom and the European Monetary Union markets and describes in part the phases of European banking financial integration. Initially indications of market efficiency at the weak-form level for each segmented market in prices and price first differences are provided. Then unlagged banking price first differences for each segment are regressed against those for the United Kingdom and the European Monetary Union markets using weighted least squares regressions. Indications of systematic and unsystematic risks in each pairwise system are thereby provided. Vector autoregressive, cointegration, causality and impulse response techniques for optimally lagged price first differences provide evidence of cointegration between the segmented European, the United Kingdom and the European Monetary Union markets. It is also evident that exogeneity in each pairwise model lies largely with the European Monetary Union. This in itself represents a strong argument for continuing European financial integration. The United Kingdom is demonstrated to be a powerful banking market. The European Monetary Union banking market would benefit from United Kingdom membership.

Keywords: Systematic and unsystematic risk, systemic risk, banking markets, integration, interdependence

JEL Classification: F36