Ion Lapteacru

Convergence of bank competition in Central and Eastern European countries: do foreign and domestic banks go hand in hand?

Abstract Following the massive entry of foreign banks into the Central and Eastern European (CEE) banking markets, one may wonder whether their competitive behaviour differs from that of their domestic counterparts, possibly leading to the segmentation of these markets at the regional and national levels. We find that the competitive behaviour of foreign and domestic banks differs, with foreign banks having less market power until the recent financial crisis and more market power after this financial turmoil. Despite this difference, banks tend to behave similarly, and their market power converges to a similar level. The tendency towards similar competitive behaviour is observed at the regional and national levels and for both foreign and domestic banks, although foreign institutions that enter these markets through the acquisition of domestic banks have slightly more market power. Our findings suggest the regional integration of CEE banking markets and no segmentation between foreign and domestic institutions.

The Z-Score is Dead, Long Live the Z-Score! A New Way to Measure Bank Risk

This paper raises questions about the consistency of the Z-score, which is the most applied accounting-based measure of bank risk. In spite of its main advantage, namely the concept of risk on which it relies, the traditional formula is precisely inconsistent with this concept. The Z-score is deduced from the probability that bank’s losses exceed its capital, but under the very unrealistic assumption of normally distributed returns on assets. Consequently, we propose a structural approach to determine this bank risk measure. It consists to define the default event when banks’ profit is lower than a default threshold level, which is based on the balance-sheet structure of banks and on new prudential regulation requirements.

Bank Risk in Central and Eastern European Countries: Does Ownership Matter?

Our main objectives are to estimate the risk of Central and Eastern European banks and determine its factors focussing on the role of ownership structures. We apply market-based risk measures and an improved Z-score and conclude that foreign and private banks are less risky than state-owned institutions. Moreover, a higher proportion of interbank deposits amplifies the risk of foreign banks and reduces that of public institutions. The effect of longterm funds is negative for state-owned banks with market-based measure, whereas it is positive with accounting-based measure. Another result is the negative impact of the concentration on interest-bearing activities on the risk of all banks regardless their ownership structure. Finally, the enforcement of the banking regulation reduces the risk of foreign banks and increases that of public institutions.

Convergence of bank competition in Central and Eastern European countries: Does ownership matter?

Many reforms of banking market liberalization in CEE countries raised the question on the convergence of banks’ competitive behaviour, particularly because of the presence of foreign banks from same European regions. We find within-country convergence of three used bank competition measures, with higher convergence levels of market power and of competitive behaviour, and with faster convergence trend for foreign banks. Despite the efforts for banking market integration, there is no general movement toward across-countries convergence of competitive behaviour of CEE banks, neither for foreign nor for domestic institutions, higher dispersion of countries being however observed for the former.