Impact of Market Structure on Performance in Central and Eastern European Banking Systems

Our empirical approach integrates a panel data analysis regarding indicators of banking sector concentration (CR3) and of banking performance (ROE), and calculation of Pearson's correlation coefficient between structure and performance indicators for the banking system in Central and Eastern Europe, between 2001 and 2010. This approach also provides a framework to examine policy-related issues. According to the SCP hypothesis, there is a positive correlation between bank profits and market concentration due to the greater possibility of collusion. From a social viewpoint, bank concentration creates an environment that can reduce social welfare. This is an issue that has important public policy implications. If the market structure in a given country is found to be highly concentrated (thus increasing the likelihood of collusion), public policy should focus on measures of increasing competition, such as discouraging mergers and acquisitions. On the other hand, if bank concentration is positively correlated with the stability of the banking system, policies should be directed at facilitating mergers or consolidations.