Determinants of bank interest margins in Central and Eastern Europe. Convergence to the West?
AbstractIn this paper we investigate the determinants of bank interest margins in Central and Eastern European countries (CEEC). We try to assess to what extent the weak performance of many banks in transition economies can be attributed to a low degree of efficiency and non-competitive market conditions on the one hand, or to the shortcomings in the regulatory banking environment and a high degree of information asymmetry on the other hand. We also provide a systematic comparative analysis of the determinants of the interest margins of CEEC banks versus banks operating in developed Western European economies. This enables us to assess to what extent the transition bank markets have converged to the West. Our main findings are that (1) the structure-conduct-performance (SCP) hypothesis cannot be rejected in either Western or Eastern European bank markets; (2) capital adequacy is an important determinant of bank margins, both in developed and transition bank markets; (3) progress in bank reform reduces the signaling strength of capital as an indicator of solvency; (4) risk behavior plays an important role in explaining high interest margins, but as reform in the corporate sector improves this effect becomes smaller and (5) higher operational efficiency is reflected in lower interest margins in both Western European bank markets and Accession countries, but not (yet) in the Eastern European bank sector as a whole. We find evidence of a gradual convergence of bank behavior in the Accession countries to a Western European pattern.
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Bibliographic InfoPaper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 03/203.
Length: 35 pages
Date of creation: Nov 2003
Date of revision:
bank interest margins; transition economies; capital adequacy; .financial convergence;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-01 (All new papers)
- NEP-EEC-2004-02-01 (European Economics)
- NEP-MFD-2004-02-01 (Microfinance)
- NEP-TRA-2004-02-01 (Transition Economics)
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