Are Product Market Structures Affected by Banking Concentration: Evidence from Transition Countries

There is growing empirical literature on the relationship between concentration in product markets and concentration in the banking sector. Cetorelli (2001, 2004) and Cetorelli and Strahan (2006) found that countries or regions with more concentrated banking sectors tend also to have more concentrated product markets, thus suggesting that the causality goes from concentration in the banking sector to concentration in product markets. These results emphasise the negative effect of banking concentration on competition in product markets and hence on efficiency and even economic growth. Similarly, Pagano (1993) provides a theoretical model and empirical evidence of an adverse effect of banking market concentration on economic growth. However, such results do not appear robust, either at the theoretical level or at the empirical level. For instance, Petersen and Rajan (1995) build a theoretical model in which banks with market power are more willing to finance young firms. They also find empirical support for such an effect. Furthermore, Hellman and DaRin (2002) propose a theory and empirical evidence showing that more concentrated banking sectors promote the development of new sectors and thus act as catalysts for industrialisation. In this paper we investigate whether the differences in the results obtained in the literature may result from the focus on different country groupings and different periods of time.