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

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  • S. CLAEYS

    ()

  • R. VANDER VENNET

    ()

Abstract

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.

Suggested Citation

  • S. Claeys & R. Vander Vennet, 2003. "Determinants of bank interest margins in Central and Eastern Europe. Convergence to the West?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/203, Ghent University, Faculty of Economics and Business Administration.
  • Handle: RePEc:rug:rugwps:03/203
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    File URL: http://wps-feb.ugent.be/Papers/wp_03_203.pdf
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    References listed on IDEAS

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    Cited by:

    1. Christophe J. Godlewski & Ydriss Ziane, 2008. "How many banks does it take to lend? Empirical evidence from Europe," Working Papers of LaRGE Research Center 2008-11, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    2. Georgios E. Chortareas & Claudia Girardone & Jesus Gustavo Garza-Garcia, 2010. "Banking Sector Performance in Some Latin American Countries: Market Power versus Efficiency," Working Papers 2010-20, Banco de México.
    3. International Monetary Fund, 2013. "Peru; Selected Issues Paper," IMF Staff Country Reports 13/46, International Monetary Fund.
    4. Kok, Christoffer & Lichtenberger, Jung-Duk, 2007. "Mortgage interest rate dispersion in the euro area," Working Paper Series 733, European Central Bank.

    More about this item

    Keywords

    bank interest margins; transition economies; capital adequacy; .financial convergence;

    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

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