The Sensitivity of European Bank Stocks to German Interest Rates Changes

This study examines the cross-border impact of central bank interest rate changes, using the example of the German Bundesbank. We examine the price impact of rate changes on both the general stock markets and on bank stocks in seven other European countries. The sample includes nations both within and outside of the European Union, and includes EU members who are participating in monetary union and members who obtained opt-outs. The results point to the existence of cross-border information transfers. Both non-German bank stocks and general equities react significantly to a large number of the Bundesbank rate changes. The results also indicate that European capital markets did differentiate between rate changes in terms of their relative importance.This was the case in terms of different responses between the financial institutions and the general equity markets and with regard to differing reactions between markets. In particular, those markets that were more committed to the exchange rate mechanism and the goal of monetary union generally reacted more than markets such as Denmark and UK. In addition, the importance of Bundesbank policy during the years leading up to EMU is supported by the fact that most non-German bank stocks reacted more to Bundesbank policy than to domestic rate changes and that no other country had the same level of influence on foreign equity returns.