The fiscal system of the South Eastern European ( SEE ) states is characterized by the dominant function of the banking sector, with the capital market section for long-run finance being illiquid and, in some instances, underdeveloped, while non-bank fiscal mediators, such as life insurance companies and private pension financess, are still at an embryologic phase of development ( European Commission [ EC ] , 2004 ) . Yet, the recent reforms, taking to liberalise and consolidate the bing Bankss, every bit good as to pull foreign 1s in the SEE banking sector, were, to a big extent, rather successful. As a consequence, the legal, institutional, regulative, and supervisory model of fiscal establishments has been systematically improved and strengthened. These comments explain why banking activities and public presentation have attracted the attending of practicians, policy shapers, and research workers likewise, doing the probe of bank profitableness in the SEE states a more relevant issue today than in earlier times.
This paper seeks to analyze the consequence of bank-specific, industry-related and macroeconomic variables on the profitableness of the SEE banking industry ( viz. Albania, Bosnia-Herzegovina, Bulgaria, Croatia, FYROM, Romania and Serbia-Montenegro ) over the period 1998-2002. It focuses on two chief waies: First, while a figure of surveies have examined the effects of internal and external factors on bank profitableness in several states and geographic parts, every bit far as we are cognizant of, barely any systematic research has been carried out for the quickly germinating SEE part ; and secondly, while separating between the structure-conduct-performance ( SCP ) and the efficient-structure ( EFS ) hypotheses, we besides account for the consequence of the reform procedure, that took topographic point during this period, and the macroeconomic environment on profitableness.
The remainder of the paper is organized as follows. Section 2 reappraisals and evaluates the reform procedure observed in the SEE banking sector over the last decennary. Section 3 provides a background of the bing literature, associating bank profitableness to its determiners. Section 4 describes the information and the econometric methodological analysis, while Section 5 nowadayss and analyses the empirical consequences. Conclusions and some policy suggestions are offered in the concluding subdivision.
2. Banking reform in the SEE states
Even though banking system restructuring was rather profound over the last decennary in most SEE states, there is still much to be done for their fiscal systems to be classified in the class of developed markets. The comparing of the development of the banking sector ( measured by the recognition to the private sector as a per centum of GDP ) with the size of the capital market ( measured by the stock market capitalisation as a per centum of GDP ) in the SEE states reveals the comparative importance of bank intermediation.[ 1 ]As it appears, from a first glance, Bankss constitute the spinal cord of fiscal systems in the part.
Despite faster development in the 2nd half of the ninetiess, when comparatively stable fiscal and macroeconomic conditions emerged, the measure and quality of banking merchandises and services still lag behind that of other emerging markets and the European Union ( EU ) . This occurs chiefly due to the unsound macroeconomic policies applied in the part and the market inefficiencies observed in the SEE states in the old decennaries, factors that, in many instances, resulted in terrible crises.[ 2 ]As a consequence, loans to the private sector, on norm, stood at about one-eighth of the recognition provided by the euro country banking system, where domestic recognition reached 120 per cent of GDP in 2002 ( European Central Bank [ ECB ] , 2004 ) . This implies that the banking sector in the SEE states, in malice of the recent enlargement, has still ample field for farther funding the economic systems ‘ investing and growing demands, if macroeconomic and institutional stableness is enhanced.
During the last few old ages, the authoritiess of the SEE states, with the coaction and aid of international fiscal establishments, have taken concrete and far-reaching steps to reform their fiscal establishments and markets. This procedure included the restructuring, rehabilitation and denationalization of state-owned Bankss, the settlement of insolvent establishments and an betterment in the administrative efficiency and capableness of the banking sector. Other factors that enhanced banking intermediation were the constitution of new prudential ordinance and tighter supervising, an betterment of accounting and revelation criterions, the acceptance of better techniques for hazard rating and plus and liability direction and, last but non least, the engagement of foreign investors.
Table 1 provides a comprehensive chronological history of of import regulative events with mentions to the most of import banking statute law – every bit good as their amendments – enacted during the last decennary. These Torahs have increased the attraction of the SEE banking system for foreign investing, strengthened prudent criterions and patterns in the Bankss ‘ operations, enhanced corporate administration, and improved efficiency in the banking operations and supervising. Deposit insurance strategies have besides played an of import stabilizing function, as they improved assurance and thereby decreased the hazards for Swift alterations in support, i.e. the sedimentation base.
Finally, macroeconomic factors, such as financial and pecuniary subject, the gradual decrease of involvement rates and hazard premiums, the rise of expected lifetime income in the part and an increasing money demand have all positively contributed to the development of fiscal markets. These developments enhanced the on-going rise and widening of intermediation in the SEE part. As a consequence, the construction of the banking industry in the SEE economic systems altered significantly during the period 1998-2002. Table 2 studies a diminution in the figure of Bankss runing in all states reviewed, except from Albania and Bulgaria. This diminution is rather significant in Bosnia-Herzegovina and Serbia-Montenegro.[ 3 ]Particularly in the latter instance, less than half of the Bankss survived during the period examined ( 50 Bankss in 2002 compared with 104 in 1998 ) , due to the closing of unsound fiscal establishments and the consolidation of smaller Bankss initiated in 2000. The decrease in the figure of recognition establishments in most SEE states was fuelled mostly by increased regulative capitalisation demands ( a policy aimed at conveying the banking sector closer to the EU capital adequateness and liquidness criterions ) and competition from foreign Bankss ( EC, 2004 ) .
3. Datas and determiners of bank profitableness in the SEE part
We use one-year bank degree and macroeconomic informations from seven SEE states ( Albania, Bosnia-Herzegovina, Bulgaria, Croatia, FYROM, Romania and Serbia-Montenegro ) over the period 1998-2002.[ 4 ]The bank variables are obtained from the BankScope database, the macroeconomic variables ( including rising prices and per capita income ) from the IMF ‘s International Financial Statistics ( IFS ) and the banking reform index from the European Bank for Reconstruction and Development ( EBRD ) . The dataset is imbalanced, it was reviewed for describing mistakes and other incompatibilities and it covers about 80 % of the industry ‘s entire assets ( including 71 Bankss in 1998, 91 in 1999, 107 in 2000, 121 in 2001 and 132 in 2002 ) .
Table 3 lists the variables used to proxy profitableness and its determiners ( we besides include notation and the expected consequence of the determiners harmonizing to the literature ) , and Table 4 nowadayss state norms. In taking the placeholders for bank profitableness, viz. ROA and ROE, we follow the literature, and we measure both as running twelvemonth norms.[ 5 ]For the whole part the period mean ROA stands at 1.2 per cent, while the mean ROE is 8.8 per cent. In what follows, we discuss the determiners of bank profitableness specific to the SEE part ( with an accent on determiners that were non discussed in the instance of Greece ) .
3.1 Bank-specific determiners
Liquidity hazard, originating from the possible inability of a bank to suit lessenings in liabilities or to fund additions on the assets ‘ side of the balance sheet, is considered an of import determiner of bank profitableness. The loans market, particularly recognition to families and houses, is hazardous and has a greater expected return than other bank assets, such as authorities securities. Therefore, one would anticipate a positive relationship between liquidness and profitableness ( Bourke, 1989 ) . It could be the instance, nevertheless, that the fewer the financess tide up in liquid investings the higher we might anticipate profitableness to be ( Eichengreen and Gibson, 2001 ) . The ratio of loans to assets ( LA ) , functioning as a placeholder for liquidness, stands at an norm of 42 per cent over the examined period, which is rather lower than the European norm ( ECB, 2004 ) . A better placeholder for liquidness would be the ratio of liquid assets to entire assets, nevertheless information is unavailable. Another option is the ratio of loans to sedimentations, which has the major disadvantage that it indicates nil about the liquidness of the bank ‘s staying assets or the nature of its other liabilities.
Sing recognition hazard we use the mean loan loss commissariats to entire loans ratio ( LLP ) , which is close to 4 per cent in the part. The hapless quality of the stock of recognition was inherited from the old government, where recognition hazard rating was negligible, and recognition policy was used as an instrument by the authorities to suit the demands of the centrally planned economic system ( Stubos and Tsikripis, 2005 ) . Despite the betterment observed over the period examined in the loan portfolio quality, the LLP ratio is still much higher in the part comparatively to the European 1.
Similarly, the mean equity to assets ratio ( EA ) , widely used in the empirical research as the cardinal capital ratio, is about 17 per cent, much higher than the European norm ( even though it varies significantly across states ) . The grounds behind this low fiscal purchase exploited in the part are the on-going restructuring procedure of state-owned fiscal establishments, the comparatively low recognition enlargement and Bankss ‘ compensation for the hapless entree to other beginnings of financess. Although the high ratio might be reassuring from the point of sound fiscal direction, it besides confirms the being of a bad degree in loaning operations and the high grade of liquidness and non-banking points on Bankss ‘ balance sheets.
The overheads efficiency ratio ( OEA ) , i.e. the ratio of operating disbursals to entire assets, is the best placeholder for the mean cost of non-financial inputs to Bankss ( French friess and Taci, 2005 ) . Operating disbursals consist of staff disbursals, which comprise wages and other employee benefits ( including transportations to pension militias and administrative disbursals ) .[ 6 ]On norm, this ratio stands at 5.4 per cent in the SEE part, much higher than the several one observed in the EU ( 1.7 per cent in 2002 ; see Organization for Economic Cooperation and Development [ OECD ] , 2003 ) . Over the period examined, the ratio of operating disbursals to entire assets exhibits a downward tendency.
We use existent Bankss ‘ assets ( logarithm ) to capture the possible relationship between bank size ( S ) and profitableness and their square in order to capture the possible non-linear relationship. Clearly, the mean bank size in Albania and Croatia is the largest among the SEE states, while the smallest 1 is that of FYROM. Overall, the banking sector includes little fiscal establishments with limited state coverage.
In Section 2, we suggested that the new regulative model in the SEE states significantly increased the attraction of its banking system for foreign investors. In the period under consideration there was a noteworthy entry of foreign Bankss, which were looking for acquisition chances in the promising – yet developing – See banking system. Foreign ownership may hold an impact on bank profitableness due to a figure of grounds: First, the capital brought in by foreign investors decrease financial costs of Bankss ‘ restructuring ( Tang et al. , 2000 ) . Second, foreign Bankss may convey expertness in hazard direction and a better civilization of corporate administration, rendering Bankss more efficient ( Bonin et al. , 2005 ) . Third, foreign bank presence additions competition, driving domestic Bankss to cut costs and better efficiency ( Claessens et al. , 2001 ) . Finally, domestic Bankss have benefited from technological spillovers brought approximately by their foreign rivals. For these grounds, an scrutiny of the impact of foreign ownership on the profitableness of SEE Bankss is a utile exercising.
The relationship between foreign ownership and profitableness is examined through the inclusion in the theoretical account of a binary silent person variable for foreign Bankss, every bit good as interaction silent persons between ownership and bank features ( liquidness, capitalisation and hazard ) . The interaction silent persons are included to analyze whether some variables have a different impact on foreign and domestic Bankss. Although the ownership information is frequently uncomplete, we are able to find the nature of the commanding involvement in virtually all instances. However, we are unable to see alterations of ownership during the sample period because the BankScope database provides ownership information for merely one twelvemonth ( the same scheme is followed by Bonin et al. , 2005 ) .
3.2 Industry-related determiners
The literature concentrating on the relationship between competition and public presentation in the banking sector includes the structural and the non-structural attacks ( for a recent overview of this literature see Berger et al. , 2004 ) . The structural attacks embrace the structure-conduct-performance ( SCP ) hypothesis and the efficient construction ( EFS ) hypothesis. These hypotheses investigate, severally, whether a extremely concentrated market causes conniving behaviour among the larger Bankss, ensuing in superior market public presentation, and whether it is the efficiency of larger Bankss that enhances their public presentation. On the other manus, the non-structural attacks, which arose from the developments in the new empirical industrial organisation ( NEIO ) literature,[ 7 ]trial competition through the usage of market power, therefore emphasizing the analysis of Bankss ‘ competitory behavior in the absence of structural steps.
The SCP hypothesis, which has been partially backed up theoretically within the context of the NEIO literature by Bikker and Bos ( 2005 ) , asserts that Bankss are able to pull out monopolistic rents in concentrated markets by their ability to offer lower sedimentation rates and to bear down higher loan rates, as a consequence of collusion or other signifiers of non-competitive behaviour. The more concentrated the market, the less the grade of competition. The smaller the figure of houses and the more concentrated the market construction, the greater is the chance that houses in the market will accomplish a joint price-output constellation that approaches the monopoly solution. Therefore, houses in more concentrated markets will gain higher net incomes ( for collusive or monopolistic grounds ) than houses runing in less concentrated 1s, irrespective of their efficiency. Yet, the EFS hypothesis postulates that concentration may reflect firm-specific efficiencies ( see Berger, 1995a ) . Since more efficient houses may be expected to capture a higher market portion, one manner of separating between the market power and efficient construction theories is to include both market portion and concentration in the profitableness equation ( Eichengreen and Gibson, 2001 ) . If concentration so becomes undistinguished, this goes against the SCP hypothesis.[ 8 ]
The SEE banking sector is, on norm, characterised by comparatively high concentration, much higher than that observed in other European markets ( ECB, 2004 ) . In Table 4 we report the 3-firm concentration ratio ( CR3 ) and the Herfindahl-Hirschman Index ( HHI )[ 9 ]based on balance sheet sums, both calculated on the footing of the present sample ; the mean HHI stands at 2,141 in the SEE banking part.[ 10 ]The banking concentration ratio seems to worsen in all SEE states during the period 1998-2002, in malice of the fact that the figure of Bankss is reduced in most of the SEE states.[ 11 ]As discussed above the market portion ( MS ) of single Bankss is besides included ( along with the HHI ) in order to separate between the SCP and the EFS hypotheses, once more measured on the footing of country-specific subsamples.
The literature lacks formal confirmation of the consequence of deregulating on bank profitableness, which might be indispensable for banking industries undergoing major restructuring. Some dated grounds, since the issue does non concern developed banking systems ( e.g. Edwards, 1977 ) , suggests that deregulating reduces the figure of recognition establishments, while increasing their size. However, as discussed above, the way of such an consequence is ill-defined ; therefore far it is non possible to find whether alterations in the strength of ordinance strengthen or weaken public presentation. Furthermore, the contestable market theory,[ 12 ]and ordinance theory in general, point out the importance of entry barriers in heightening profitableness, while some other regulative intercessions may hold an opposite consequence. Mamatzakis et Al. ( 2005 ) supply grounds that a non-collusive behaviour among Bankss is in operation in the SEE banking industry, proposing the being of a contestable market. For illustration, entry limitations are supported as being necessary for the bar of catastrophic competition, insecure and unsound banking patterns, and bank failures. In contrast, other surveies on passage states have highlighted the fact that the fiscal reform procedure positively affects Bankss ‘ profitableness and that banking sector reform is a necessary status for the development and deepening of the sector ( Fries and Taci, 2002 ) .
In this paper, we introduce the EBRD index of banking system reform in the SEE states to place the advancement in countries such as: I ) the acceptance of ordinances harmonizing to international criterions and patterns, two ) the execution of higher and more efficient supervising, three ) the denationalization of state-owned Bankss and four ) the write-down of non-performing loans and the closing of insolvent Bankss. This index provides a ranking of advancement for liberalisation and institutional reform of the banking sector, on a graduated table of 1 to 4+ . A mark of 1 represents small alteration from a socialist banking system apart from the separation of the cardinal bank and commercial Bankss, while a mark of 4+ represents a degree of reform that approximates the institutional criterions and norms of an industrialised market economic system. On the footing of this index, SEE states get an mean mark around 2.8 in 2002, most of them coming up from much lower degrees observed in 1998. Overall, these tonss imply that, despite the betterment that took topographic point recently in the banking system of the SEE states, still this sector has non reached the degree of EU pattern ( with a mark of 4+ ) .
3.3 Macroeconomic determiners
Similarly, differences among the SEE states in the mean value of the macroeconomic variables are important. To capture the consequence of the macroeconomic environment we use rising prices ( INF ) and existent per capita income ( RGC ) .[ 13 ]The mean SEE rising prices rate is much higher compared with that of the EU, while existent per capita income is much lower, standing on norm at a‚¬2,362, the highest being observed in Croatia ( a‚¬4,874 ) and the lowest in Albania ( a‚¬1,320 ) .[ 14 ]Finally, we account for the fiscal crises discussed in Section 2, by including separate clip silent persons for FYROM ( 1999 ) and Romania ( 1997-1998 ) .[ 15 ]
4. Econometric specification
To prove the relationship between bank profitableness and the bank-specific, industry-related and macroeconomic determiners described above, we estimate a additive arrested development theoretical account of the undermentioned signifier:[ 16 ]
( 1 )
where i??its is the profitableness of bank I at clip T for state s, with one = 1, aˆ¦ , N ; t = 1, aˆ¦ , T ; s = 1, aˆ¦ , S, degree Celsius is a changeless term, the I§s are explanatory variables ( grouped into bank-specific, industry-related and macroeconomic determiners, J, cubic decimeter and m severally ) and Iµits is the perturbation, with six capturing the unseen bank-specific consequence and uits the idiosyncratic mistake. This is a one-way mistake constituent arrested development theoretical account, where six i?? IIN ( 0, i??2v ) and independent of uits i?? IIN ( 0, i??2u ) .
We apply the least squares methods of fixed effects ( FE ) and random effects ( RE ) theoretical accounts. Under a FE theoretical account the ‘s are considered fixed parametric quantities to be estimated,[ 17 ]while under a RE theoretical account the ‘s are assumed to be random and the appraisal method is generalized least squares ( GLS ) .[ 18 ]There is strong grounds that our specification follows a RE theoretical account as the Hausman trial indicates ( the relevant p-values are 0.243 and 0.144 for the ROA and ROE equations severally ) .[ 19 ]We have besides considered two and three-stage least squares ( 3SLS ) calculators, in the spirit of Altunbas and Molyneux ( 1994 ) , in order to place possible prejudices in the parametric quantities due to endogeneity of the capitalisation and/or liquidness variables. However, the estimations are unusually similar to the RE estimations and hence they are non reported.
Furthermore, due to the significant differences that exist in the banking environments of the SEE states, we should prove for possible cross-country and clip effects. Failing to account for these might bias the estimations in unknown magnitudes and waies. We test for state and clip effects by including country- and time-specific silent persons, severally, in combining weight. ( 1 ) . Therefore, the econometric theoretical account is expanded as follows:
( 2 )
where D stands for the country-specific silent person variables and I»I„ counts for the unobservable clip effects.[ 20 ]
We test these hypotheses individually every bit good as jointly, and we present the consequences in Table 5. The relevant Lagrange Multiplier ( LM ) tests clearly show that merely country-specific silent person variables are needed, as the clip effects are undistinguished. Hence, we proceed with the appraisal of the undermentioned specification:[ 21 ]
( 3 )
5. Empirical consequences
Tables 6 and 7 contain the estimated parametric quantities and t-statistics obtained from the application of RE to the theoretical account of combining weight. ( 3 ) , utilizing ROA and ROE, severally, as the independent variable. The estimated equations seem to suit the panel moderately good, as indicated by the Wald trials and R-squared values, holding reasonably stable coefficients among the alternate theoretical accounts. In these equations we include a dummy variable to account for the 1997-98 crisis in Romania ( Drc ) , which was found to be negative and statistically important. In contrast, the silent person variable for FYROM was dropped from the concluding appraisals, since it was ne’er found to be statistically important. The first column of Tables 6 & A ; 7 gives the preferable theoretical account. The 2nd equation includes merely HHI ( and non MS ) in order to analyze the relevancy of the SCP hypothesis ( see treatment in Section 3 ) , the 3rd includes the EBRD index ( but excludes the macroeconomic variables, since EBRD was found to be extremely collinear with both INF and RGC ) , and the 4th includes an interaction silent person between foreign ownership and recognition hazard.
The consequence of bank-specific variables is in line with outlooks, with the noteworthy exclusion of the liquidness hazard variable ( LA ) , which is positive but undistinguished. The account may be that the SEE banking system still lacks the resources to run into the liquidness criterions of the developed banking systems, keeping an illiquid place to forestall failures. In contrast, the recognition hazard variable ( LLP ) is negatively and significantly related to bank profitableness, demoing that the SEE Bankss should concentrate more on recognition hazard direction, which has been proved debatable in the recent yesteryear. Serious banking jobs have arisen from the failure of Bankss to acknowledge impaired assets and create militias for writing-off these assets. An huge aid towards smoothing these anomalousnesss would be provided by bettering the transparence of the fiscal systems, which in bend will help Bankss to measure recognition hazard more efficaciously and avoid jobs associated with risky exposure.
The positive and extremely important coefficient of the capital variable, particularly when ROA is used as the dependant variable, comes as no surprise.[ 22 ]The SEE fiscal system is far from being characterized as a perfect capital market with symmetric information, under which the impact of increased capital on profitableness would be negative ( Berger, 1995b ) . Therefore, SEE Bankss, through stronger capitalisation, can ( i ) cut down the expected costs of fiscal hurt and ( two ) believably transmit the outlook of better public presentation.
The operating disbursals variable nowadayss a negative and important consequence on profitableness. This implies a deficiency of competency in disbursals direction, since Bankss pass portion of increased cost to clients and the staying portion to net incomes, perchance due to the fact that competition does non let them to “ soak ” . Clearly, efficient cost direction is a requirement for the improved profitableness of the SEE banking system ( the high snap of profitableness to this variable denotes that Bankss have much to derive if they improve their managerial patterns ) , as this sector has non reached the adulthood degree required to associate quality effects pending from increased disbursement to higher bank net incomes.
The estimated equations when ROA is the dependent variable show that the consequence of bank size on profitableness is normally positive and statistically important, while the relationship is additive ( the square of bank assets is negative but undistinguished ) . This provides grounds for the economic systems of graduated table theory. The European Commission ( 1997 ) , in look intoing the cost features of assorted European banking sectors, reported that as banking systems approach a higher degree of edification in footings of engineering and productiveness, chances from working economic systems of graduated table might be rather limited. Hence, we expect this relationship to weaken over clip.
Sing foreign ownership, our findings show that foreign Bankss runing in the SEE states perform significantly better in footings of both ROA and ROE than domestic Bankss. This determination is non surprising in visible radiation of old research sing passage economic systems ( see Bonin et al. , 2005 ) . In peculiar, we explored two of the possible grounds: First, we tested for superior hazard direction of foreign Bankss by gauging an alternate equation that includes an interaction silent person between foreign ownership ( Dfo ) and recognition hazard ( see column 4 of Tables 6 & A ; 7 ) . The consequences indicate that this silent person is non significantly different from zero, proposing no important differences between foreign and domestic Bankss. Besides, we used an interaction silent person between foreign ownership and capital ( non reported in the tabular arraies ) , which was found to be positive and statistically important ( tROA = 6.60, tROE = 1.88 ) . The latter consequences suggest that capital is an every bit of import determiner of profitableness for domestic and foreign Bankss.
The empirical consequences besides show that concentration positively affects bank profitableness but merely when profitableness is measured by ROA. Some farther ambiguity arises due to the fact that the relevant t-statistic falls ( whilst, nevertheless, staying marginally important at the 5 % degree ) when MS enters the estimated theoretical account. As observed in other surveies ( Smirlock, 1985 ; Evanoff and Fortier, 1988 ; Altunbas and Molyneux, 1994 ) , when both market portion and concentration variables are included in the theoretical account, the latter loses its explanatory power. Since here concentration remains important, the SCP hypothesis is verified, while the higher t-statistics of HHI when MS are excluded from the estimated theoretical account ( see column 2 ) indicate that the EFS hypothesis may besides be relevant. Since a research worker could trust on non-structural steps of competition, this is a desideratum for future research.
The EBRD index suggests a negative and important consequence on bank profitableness, corroborating the contestable market theory at least at this phase of market development. The betterment in the regulative model, the ascertained important recognition enlargement and the gradual acceptance of sound macroeconomic policies, have all positively contributed to competition. While competition could take down fiscal intermediation costs and lend to an betterment in economic efficiency, it could cut down market power and the profitableness of Bankss. Therefore, it appears that reform, at this phase of fiscal system edification, causes Bankss to offer progressively competitory borders on loans and sedimentations, which in bend lowers profitableness.
Finally, rising prices positively and significantly affects profitableness. This implies that, with rising prices, bank income increases more than bank costs, which may be viewed as the consequence of the failure of bank clients ( comparative to bank directors ) to calculate future rising prices. Therefore, above normal net incomes can be extracted from the asymmetric information obviously present in the SEE fiscal market. On the other manus, existent GDP per capita does non look to show any important consequence on bank profitableness ( even though the consequences strengthen when ROE is used ) , a consequence that is slightly surprising. One possible account is that the tight pecuniary policy of the examined period constrains bank lending.. Thus, every bit shortly as monetary value stableness is achieved, we should anticipate a stronger relationship between economic growing and bank net incomes, through increased loaning, betterment in bank plus quality, sweetening of borrowers entree to the SEE markets and lessening in supervisory stamina every bit good as uncertainness associated with macroeconomic instability.
6. Reasoning comments
In this paper, we have analyzed the consequence of a carefully selected set of determiners on bank profitableness in the SEE part. Our survey involved three stages: ( I ) a brief description of the banking system under reappraisal ; ( two ) a treatment of the determiners of bank profitableness ; ( three ) the empirical testing of a random effects theoretical account, followed by the presentation of the consequences and some policy deductions.
The empirical consequences provide a strict consensus that the SEE states need a stable, profitable and efficient banking system in order to finance both private and public investing and expenditures. As shown in this analysis, the increasing degrees of fiscal reform ( closely related to general economic growing ) and betterment in the construction of the recognition establishments ‘ aggregated balance sheet, are joint ( albeit reverse ) determiners of bank profitableness. Therefore, as integrating facilitates the existent or possible market entry of foreign establishments to the financially less developed market, SEE domestic recognition establishments will happen themselves exposed to increased competitory force per unit area from more sophisticated and cheaper foreign mediators. Enhancement of bank profitableness, as a status for enabling national banking sectors to last in a individual market by affording competitory involvement rates, requires new criterions in hazard direction ( capital and recognition ) and runing efficiency, which, harmonizing to the grounds presented here, crucially affects net incomes.
As the SEE banking industry continuously evolves, alterations in industry composing and the macroeconomic environment have a direct impact on the aggregative public presentation of the industry. Evidence have been found in support of both the SCP and the EFS hypotheses. Concentration is positively ( and normally significantly ) correlated with bank profitableness when market portion is besides included in the estimated theoretical account ( which verifies the SCP hypothesis ) , while exclusion of market portion from the theoretical account further strengthens the consequences ( which provides partial support for the EFS hypothesis ) . Finally, from the macroeconomic variables, rising prices has a strong consequence on the profitableness of the banking sector in the SEE part, while bank net incomes are non significantly susceptible to existent GDP per capita fluctuations, likely owing to the particulars of the ( little ) sample period, characterized by tight financial and pecuniary policies. However, as fiscal systems develop and the reform procedure ends, both the current and future rates of economic growing are likely to hold an enhanced impact on bank profitableness.
We contend that farther research of the quickly developing SEE fiscal sector should foreground the forms of competition in banking ( likely within the context of the NEIO literature when relevant informations becomes available ) , the effects of denationalization on price-cost borders and the overall degree of proficient and allocative efficiency. At a broader degree of analysis, the SEE instance testifies to the interrelatedness between these microeconomic issues, political schemes and economic policy picks.