Determinants of Bank Interest Margins in Central and Eastern Europe: A Comparison with the West

Abstract

We investigate the determinants of bank interest margins in the Central and Eastern European countries (CEEC). We assess to what extent the relatively high bank margins in CEEC can be attributed to low efficiency or non-competitive market conditions, controlling for the macroeconomic environment and the influence of foreign and state-owned banks. We systematically compare CEEC banks with Western European banks. Our results indicate that banking in the CEEC is on a virtuous path, at least in the EU accession countries: Increased efficiency benefits customers, while capital adequacy supports systemic stability. In the non-accession countries, important policy actions are required.

Keywords: Bank interest margins, Transition economies, Institutional reform

JEL Classification: G21, G28, P34