Competition, Concentration, Efficiency, and their Relationship in the Polish Banking Sector

European banking sectors have been subject to various forms of deregulation, liberalization, as well as dramatic improvements in information technology (IT). As the result of the creation of the European Union's Single Market, the financial institutions are transforming themselves in response to fundamental changes in regulation and technology. Many of these changes have vast implications for competition, concentration and the efficiency of the financial sectors. This paper examines the impact of increasing concentration and new technologies, linked with the mergers and acquisitions (M&A) process, on the degree of competition and technical efficiency of the Polish commercial banks. The goal of this paper is to check whether, during the analyzed period (1997- 2002), the concentration of the commercial banks had a negative impact on the competition in the Polish banking sector. In order to carry out a quantitative assessment of changes in the market structure and technical efficiency of the Polish banking sector, the study estimates competitive behavior in the Polish banking system by applying the method developed by Panzar and Rosse (1987). Moreover, this study assesses the technical efficiency and productivity in the Polish banking sector by applying the method of Data Envelopment Analysis (DEA). The empirical results, for the analyzed period of 1997-2002, have shown that in Poland there is monopolistic competition. It seems that foreign entry, connected with the M&A process, and rapid changes in IT in Polish commercial banks, is one of the reasons for the improving technical efficiency measures and productivity indices. It has also influenced the level of competition in the Polish banking sector.