Concentration, competition and financial stability in the South-East Europe banking context

The banking industries of South-East European (SEE hereafter) countries are the main channel through which financial resources are distributed across the region and over the last decades they have witnessed deep structural changes such as privatisations, consolidation and cross-border acquisitions. The purpose of this study is to shed further light on how concentration, competition and the financial stability of these banking industries has changed over time. In addition, this study investigates how concentration and competition in the SEE banking industries affects the financial stability of SEE banks. By using alternative measures of market concentration and competition, I find a reduction in the degree of concentration as well as market structures characterised by monopolistic competition. Furthermore, using several measures of financial stability I find a reduction of non-performing loans as well as a reduction in the probability of insolvency of SEE banks. When analysing the effects of either concentration or competition measures on the financial stability of SEE banks, this study reveals that an increase in market concentration results in a reduction of the non-performing loans ratios, therefore indicating greater financial stability of SEE banks. On the other hand, by using the Lerner index as a measure of competition, the findings presented in this study reveal that an increase in banks’ market power has the effect of increasing non-performing loans ratios of SEE banks. Finally, by breaking down SEE banks in accordance with their ownership (i.e. domestic versus foreign ownership) and size (large versus small banks), this study reveals mixed results in relation to the effect of both concentration and competition measures on the financial stability of SEE banks.