Bubble, bubble, credit trouble? The effect of EU membership on household loan rates

Abstract: This paper examines what effect EU accession - officially joining the EU as a full member - has on the new member state's market for household credit. Low lending rates have a positive effect on consumer welfare by increasing disposable income, but can also contribute to economic disaster (notably the recent subprime and sovereign-debt crises). The main purpose of this paper is to aid policymakers and other stakeholders in crafting informed credit market policy. We create a model of rate-setting behavior that can be used as a tool for predicting effects of economic, financial, and political reform, and use this model to empirically estimate the effect of EU accession on national household credit rates. We find that EU accession correlates with a drop in lending rates, which is more pronounced for short-term consumption loans than for long-term home loans. We attempt to evaluate whether this drop in lending rates stems from policy and regulative changes or from other factors, but cannot draw any reliable conclusions in this area.