Competition and contestability in Central and Eastern European banking markets

This study sets out to examine the evolution of competitive conditions in the banking industries of 14 Central and Eastern European (CEE) transition economies for the period 1993‐2000.

The basis for the evaluation of competitive conditions is the extant oligopoly theory in the new industrial organization literature, specifically, the competition model developed by Panzar and Rosse.

The results of the competition analysis suggest that the banking markets of CEE countries cannot be characterized by the bipolar cases of either perfect competition or monopoly over 1993‐2000 except for FYR of Macedonia and Slovakia. That is, banks earned their revenues as if operating under conditions of monopolistic competition in that period. An analysis of changes in competitive structure shows a higher degree of competition in the later years of the sample period. Large banks in transition countries are found to be operating in a relatively more competitive environment compared with small banks or, in other words, competition is lower in local markets compared with national and international markets.

The period under investigation corresponds to early years of the ongoing transition from central planning when these countries were lacking many market‐supportive institutions essential for efficient financial markets. Therefore, the results of this study should be interpreted with the necessary scholarly scrutiny.

The paper measures the level of market contestability that may have been facilitated by the recent liberalization and deregulation progress.

The paper is highly original. Although research on the bank competition in the USA and other developed countries is voluminous, research that focuses on transition economies is relatively scant.