Convergence of bank competition in Central and Eastern European countries: do foreign and domestic banks go hand in hand?

Abstract

Following the massive entry of foreign banks into the Central and Eastern European (CEE) banking markets, one may wonder whether their competitive behaviour differs from that of their domestic counterparts, possibly leading to the segmentation of these markets at the regional and national levels. We find that the competitive behaviour of foreign and domestic banks differs, with foreign banks having less market power until the recent financial crisis and more market power after this financial turmoil. Despite this difference, banks tend to behave similarly, and their market power converges to a similar level. The tendency towards similar competitive behaviour is observed at the regional and national levels and for both foreign and domestic banks, although foreign institutions that enter these markets through the acquisition of domestic banks have slightly more market power. Our findings suggest the regional integration of CEE banking markets and no segmentation between foreign and domestic institutions.

Keywords:

• Central and Eastern European countries
• banking
• competition
• convergence
• banking market integration

Acknowledgements

We would like to thank two anonymous referees, the participants at the 2017 INFINITI Conference in Valencia, the 2017 European Economics and Finance Society (EEFS) Conference in Ljubljana, the 2017 European Research Group (GdRE) Conference in Paris and Pierre-Henri Faure for their valuable comments and helpful suggestions, which led to considerable improvements to a previous version of this paper. All remaining errors are our own.

Notes

1. In line with many other studies (Fernández de Guevara et al., 2007; Maudos & Fernández de Guevara, 2007; Solís & Maudos, 2008) and because of data availability, we use total assets instead of the number of employees.

2. Many authors use the price of physical capital instead of the price of other inputs. We employ the latter because the data used in its calculation are available for most banks and because it comprises all other inputs – not just a specific one.

3. The Lerner index with the second lag is not statistically significant in all regressions. However, we also performed regressions of the Lerner index with two lags, and the results are unchanged.

4. The benchmark country is the country with respect to which we compute the differences between the convergence levels with other countries.

5. As foreign banks lack information about customers and the business environment, they prefer to acquire existing customer portfolios through the acquisition of domestic banks.