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Financial and Monetary Integration in the New Europe

Convergence Between the EU and Central and Eastern Europe

Edited by David G. Dickinson and Andrew W. Mullineux

Potential new entrants to the European Union from Central and Eastern European countries face many challenges to achieve financial convergence with the existing EU nations. Using detailed case studies from Bulgaria, the Czech Republic, Latvia, Lithuania and Poland and analysis of cross country data from these regions, Financial and Monetary Integration in the New Europe looks at the key issues for applicant countries as they negotiate the terms of their membership in the European Union. Of major concern to these countries is the financial sector and its implications for economic growth and the conduct of macroeconomic policy. The book examines, in particular, monetary and exchange rate policies, banking regulation and financial market efficiency. The overall impact of building a market driven financial system on economic development is also explored.
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Chapter 19: The impact of market structure and efficiency on bank profitability: an empirical analysis of banking industries in Central and Eastern Europe

Convergence Between the EU and Central and Eastern Europe

Céeline Gondat-Larralde and Laetitia Lepetit


CŽline Gondat-Larralde and Laetitia Lepetit* INTRODUCTION On 1 January 1998, the European Union (EU) enlargement process was reactivated, as five Central and Eastern European (CEE) countries1 Ð Hungary, Poland, the Czech Republic, Slovenia and Estonia Ð were invited by the EU to enter into negotiations leading to their membership. Even if some regional integration has been achieved as trade and investment flows progressively and significantly increased, the CEE countries still retain some of the characteristics of transition economies, making their near-term entry problematic. However, such a scheme would constitute the ultimate phase of a decade-long economic transition process. Current and past changes in the competitive process have considerably reshaped the world banking industry. Nowadays, competition is considered by banking authorities more as an efficiency-enhancing factor than as a potentially destabilizing element. Within such a remodelled financial environment, CEE economies have initiated a profound metamorphosis of their banking industry. They have done so by creating a new economic agent, the banking firm, after abandoning the socialist financial system based on centralized payments and on soft budget constraints. First, authorities implemented a rapid deregulation and liberalization phase, giving priority to the competitive aspect of banking restructuring. Subsequently, CEE economies have been (and some of them still are) confronted with a consolidation trend. Even though the vulnerability of banking systems remains an AchillesÕ heel of transition * We would like to thank Professors D. Lacoue-Labarthe, A.W. Mullineux, A. Sauviat and A. Tarazi, and Dr F. Strobel for their valuable comments and support. 416 The impact...

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