Relationship between Market Structure and Bank Performance: Empirical Evidence for Central and Eastern Europe

This study aims to assess the role of market structure in the pricing behaviour and profitability of Central and Eastern European banks. In order to determine the most important variables related to the banks' pricing behaviour and profitability, we create a simple Cournot model. Then using these exogenous variables we build non-formal equations for testing the SCP (structure-conduct-performance) and the RMP (relative market power) hypotheses. Using the data of individual banks of eight Central and Eastern European countries in the period of 1998-2001 the tests reject the SCP hypothesis, but confirm the RMP hypothesis. In addition, we show that other factors, such as costs, risks, reserve ratio as well as the depth of bank intermediation also play an important role in banks' performance.bank performance, market structure, market power.

Competition in the Hungarian Banking Market

This paper investigates the degree of bank competition in Hungary on various submarkets. An overview of stylised facts on the market structure, pricing behaviour and entry barriers suggests that the degree of competition may be rather different in the individual submarkets. Looking at the pricing practice of Hungarian banks, a possible use of market power may be conjectured in consumer lending. By contrast, it may be presumed that competitive pricing prevails in the corporate lending market. We prove our assumption by using the Bresnahan model, which belongs to the non-structural approaches of measuring competition. We conducted our empirical investigation using different measures of output, i.e. interest-bearing assets, loans, interest-bearing liabilities and deposits, for the period between December 1996 and September 2003. In respect of consumer loans, we analysed a panel sample for a shorter time horizon, i.e. the period between March 2001 and September 2003. Based on our results, it is safe to assume that the degree of competition in the loan and deposit markets falls between perfect competition and the Cournot equilibrium. In contrast, the consumer credit market is characterised by a much lower degree of competition, i.e. between Cournot equilibrium and perfect collusion. In addition to measuring competition, we attempted to determine losses in consumer surplus caused by banks, as well as the degree of the market power (measured by the Lerner index).market structure, degree of competition and market power.

Analysis of banking system efficiency in the European Union

In addition to aspects related to financial stability, the cost efficiency gap observed between the banking systems of the old and the new EU member states is also unfavourable from a welfare point of view. In the majority of new member states, banks are likely to price the relatively high rate of cost efficiency losses and the oligopolistic factor linked to insufficient competition in the interest rates. The high loan and low deposit interest rates may prevent, through the volume effect, an upturn in savings and investment propensity, and thereby the implementation of a higher path of economic growth. In the course of our research, we measured variations in efficiency in the member states of the European Union and attempted to explain the reasons for such differences. We evidenced on an empirical basis that the degree of differences between member states and their change through time is significantly determined by the characteristics of the operational environment and the conscious behaviour of management. The conscious behaviour of management is of exclusive relevance in the long term, for the impact of advantages and disadvantages underlying the operational environment is reduced or eliminated through the integration of financial markets and institutions and the establishment of the Single European Market.parametric approach, X- and alternative profit-efficiency, Fourier-flexible functional form, banking system.

Bank Efficiency in the Enlarged European Union

This paper aims to estimate bank efficiency differences across member states of the European Union and tries to explain their causes. We show on an empirical basis that the level and spread of bank efficiency in the EU and their changes are significantly determined by characteristics of operational environment and the “conscious” behaviour of management.In the long term, through the integration of financial markets and institutions, as well as the establishment of the Single European Banking Market, the impact of advantages and disadvantages underlying the operational environment is reduced or eliminated; therefore only managerial ability is of any relevance. Our findings suggest that there is a costefficiency gap and convergence between the old and new member states, irrespective of the specifications of the model. With respect to profit efficiency, however, differences in efficiency between the two regions are only established after controlling for some major characteristics of the varying operational environments. Our study also investigates the relevance of and the correlation between accounting-based and statistics-based efficiency indicators. We conclude that the accounting based efficiency indicators are inadequate for managing heterogeneity arising from institutional and operational environments. Hence such indicators only allow limited cross-sectional comparison through time.parametric approach, X- and alternative profit-efficiency, Fourier-flexible functional form, banking system.

A Structural Empirical Analysis of Retail Banking Competition: the Case of Hungary

In this paper we analyze the degree of competition in the Hungarian household credit and deposit markets. We estimate discrete-choice, multinomial logit deposit service and loan demand functions for each bank and calculate the corresponding price elasticities. Two models of the banking industry are considered: a static, differentiated product Nash-Bertrand oligopoly (as non-collusive benchmark) and a cartel. With estimated marginal costs and observed interest rates we calculate the price-cost margins and compare these to the theoretically implied ones. We find that in our sample period the competition in the Hungarian banking sector is low, i.e. price-cost margins are high.Demand, discrete choice, product differentiation, banking, market power.

Credit Growth in Central and Eastern Europe: Convergence or Boom?

Credit to the private sector has been growing very rapidly in a number of Central and Eastern European countries in recent years. The main question is whether this dynamics is an equilibrium convergence process or may rather pose stability risks. Using panel econometric techniques, this paper attempts to identify the equilibrium credit/GDP levels of the new EU countries, disentangling the observed growth into an equilibrium trend and an excess (boom) component. In the paper the pooled mean group estimator was used for its flexibility and efficiency. Using instrumental variable technique we tested whether long run endogeneity affects the consistency. The estimations show that large part of the credit growth in new member states can be explained by the catching-up process, and, in general, credit/GDP ratios are below the levels consistent with macroeconomic fundamentals. However, in Latvia and Estonia credit growth is found to be significantly faster than what would be justified along the equilibrium path.financial deepening, credit growth, transition economies, panel econometrics, endogeneity bias.