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Comparing market power at home and abroad: evidence from Austrian banks and their subsidiaries in CESEE

Author

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  • Martin Feldkircher

    (Oesterreichische Nationalbank, Foreign Research Division)

  • Michael Sigmund

    (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

Abstract

In this study, we examine markups of Austrian banks and their subsidiaries in Central, Eastern and Southeastern Europe (CESEE) on an unconsolidated level. Markups are evaluated by means of the Lerner index by simultaneously estimating a price and a cost function derived from oligopoly theory. For that purpose, we use a novel fixed effects seemingly unrelated regression approach and a unique supervisory dataset covering around 800 banks over the period from the first quarter of 2008 to the second quarter of 2016. We find evidence for positive markups for Austrian subsidiaries in CESEE. These markups are even higher than the markups of Austrian parent banks, which emphasizes the importance of the CESEE markets for the overall profitability of the Austrian banking sector. Looking at the determinants of markups for Austrian subsidiaries in CESEE, we find that higher Lerner indices are associated with better capitalization, higher loan loss provisions and, more generally, greater size – the latter effect is especially true for banks in more developed host countries. Also, there is a negative correlation between the Lerner indices of subsidiaries and parent banks. This implies that opportunity costs in the home country play a role in determining market power in the host country.

Suggested Citation

  • Martin Feldkircher & Michael Sigmund, 2017. "Comparing market power at home and abroad: evidence from Austrian banks and their subsidiaries in CESEE," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q3/17, pages 59-77.
  • Handle: RePEc:onb:oenbfi:y:2017:i:q3/17:b:4
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    References listed on IDEAS

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    More about this item

    Keywords

    Lerner index; banking sector; market power; CESEE;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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