Convergence Between the EU and Central and Eastern Europe
Edited by David G. Dickinson and Andrew W. Mullineux
Chapter 19: The impact of market structure and efficiency on bank profitability: an empirical analysis of banking industries in Central and Eastern Europe
19. The impact of market structure and efficiency on bank profitability: an empirical analysis of banking industries in Central and Eastern Europe 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...
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