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Determinants of bank interest margins in Central and Eastern Europe. Convergence to the West?

  • S. CLAEYS

    ()

  • R. VANDER VENNET

    ()

In 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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Paper 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.

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Length: 35 pages
Date of creation: Nov 2003
Date of revision:
Handle: RePEc:rug:rugwps:03/203
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  1. Steven Fries & Damien Neven & Paul Seabright, 2002. "Bank performance in transition economies," Working Papers 76, European Bank for Reconstruction and Development, Office of the Chief Economist.
  2. Corvoisier, Sandrine & Gropp, Reint, 2001. "Bank Concentration and Retail Interest Rates," Working Paper Series 0072, European Central Bank.
  3. Martinez Peria, Maria Soledad & Mody, Ashoka, 2004. "How Foreign Participation and Market Concentration Impact Bank Spreads: Evidence from Latin America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 511-37, June.
  4. Maudos, Joaquin & Fernandez de Guevara, Juan, 2004. "Factors explaining the interest margin in the banking sectors of the European Union," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2259-2281, September.
  5. De Bandt, Olivier & Davis, E. Philip, 2000. "Competition, contestability and market structure in European banking sectors on the eve of EMU," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 1045-1066, June.
  6. Barth, James R. & Caprio Jr., Gerard & Levine, Ross, 2001. "Bank regulation and supervision : what works best?," Policy Research Working Paper Series 2725, The World Bank.
  7. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 891-911, May.
  8. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 581-600, November.
  9. Demirguc, Asli & Huizinga, Harry, 1999. "Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence," World Bank Economic Review, World Bank Group, vol. 13(2), pages 379-408, May.
  10. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Bank concentration and crises," Policy Research Working Paper Series 3041, The World Bank.
  11. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
  12. Gorton, Gary & Winton, Andrew, 1998. "Banking in Transition Economies: Does Efficiency Require Instability?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 621-50, August.
  13. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  14. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
  15. Mitchell Berlin & Loretta J. Mester, 1997. "Deposits and relationship lending," Working Papers 96-18, Federal Reserve Bank of Philadelphia.
  16. Brock, Philip L. & Rojas Suarez, Liliana, 2000. "Understanding the behavior of bank spreads in Latin America," Journal of Development Economics, Elsevier, vol. 63(1), pages 113-134, October.
  17. Park, Sangkyun & Peristiani, Stavros, 1998. "Market Discipline by Thrift Depositors," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 347-64, August.
  18. Goldberg, Lawrence G. & Rai, Anoop, 1996. "The structure-performance relationship for European banking," Journal of Banking & Finance, Elsevier, vol. 20(4), pages 745-771, May.
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