Asymmetric Dynamic Conditional Copula Correlation and Fundamental Determinants of Interest Rate Comovement

We study time-varying interest rate comovement and its determinants for the retail banking sector in the euro area over pre-crisis and during crisis, between 2003 and 2018. The analysis is conducted for 11 euro area countries, each classified as either core or periphery. Copula Asymmetric DCC-GARCH is estimated for each country-pair to measure the dynamic interest rate correlations for deposits and loans to households. We then examine the determinants by regressing quarterly correlations on macroeconomic and cross-border linkages, banking, and sociological variables. We also assess the impact of the two crises and of policy initiatives, including negative interest rate, Single Supervisory Mechanism, and Single Regulatory Mechanism. Different panel regressions reveal limited, although varied, influence of determinants on correlations across different products, maturities, and country groups. We conclude that the intrinsic features of the retail banking industry, such as customers trust, information asymmetry, and political influence, hinder strong interest rate convergence in the euro area.