The Competitive Advantage of Incumbents: Evidence from Newly Liberalized Banking Industries

Abstract

The paper analyzes banking competition in newly liberalized banking industries, where the incumbent banks still dominate the deposit market but are exposed to substantial loan market competition. We argue that incumbent banks, due to their preferential position in the deposit market, are able to generate higher margins than new entrants. Moreover, margins of new entrants are negatively affected by the incumbents' preferential position in the deposit market. The analysis is based on data from 296 banks from ten Central and Eastern European countries for the period 1995-2004.