Determinants of bank interest margins in Central and Eastern Europe ...

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Determinants of bank interest margins in Central and Eastern Europe. Convergence to the West?

Sophie Claeys 1 Rudi Vander Vennet 2

November 2003 2003/203

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Sophie Claeys, Department of Financial Economics, Ghent University, [email protected] Rudi Vander Vennet, Department of Financial Economics, Ghent University.

D/2003/7012/41

Determinants of bank interest margins in Central and Eastern Europe. Convergence to the West? Sophie Claeys and Rudi Vander Vennet Ghent University, Belgium November 2003

Abstract In this paper we investigate the determinants of bank interest margins in Central and Eastern European countries (CEEC). We try to assess to what extent the weak performance of many banks in transition economies can be attributed to a low degree of e¢ ciency and non-competitive market conditions on the one hand, or to the shortcomings in the regulatory banking environment and a high degree of information asymmetry on the other hand. We also provide a systematic comparative analysis of the determinants of the interest margins of CEEC banks versus banks operating in developed Western European economies. This enables us to assess to what extent the transition bank markets have converged to the West. Our main …ndings are that (1) the structure-conduct-performance (SCP) hypothesis cannot be rejected in either Western or Eastern European bank markets; (2) capital adequacy is an important determinant of bank margins, both in developed and transition bank markets; (3) progress in bank reform reduces the signaling strength of capital as an indicator of solvency; (4) risk behavior plays an important role in explaining high interest margins, but as reform in the corporate sector improves this e¤ect becomes smaller and (5) higher operational e¢ ciency is re‡ected in lower interest margins in both Western European bank markets and Accession countries, but not (yet) in the Eastern European bank sector as a whole. We …nd evidence of a gradual convergence of bank behavior in the Accession countries to a Western European pattern.

Keywords: bank interest margins, transition economies, capital adequacy, …nancial convergence. JEL Classi…cation : G21, G28 The authors thank Koen Schoors and participants at the 2003 SUERF Colloquium for useful comments. The authors acknowledge …nancial support from the Programme on Interuniversity Poles of Attraction of the Belgian Federal O¢ ce for Scienti…c, Technical and Cultural A¤airs, contract No. P5/2.

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1

Introduction

This paper has two main objectives : (1) to investigate the determinants of bank interest margins in Central and Eastern Europe and (2) to assess the degree of convergence in terms of bank behavior between Western and Eastern Europe. First, …nancial intermediation is essential for economic development. Some authors have even provided evidence of a causal link between the degree of …nancial intermediation and subsequent economic growth (Levine and Zervos, 1998). This issue is of particular importance for the Central and Eastern European transition Countries (CEEC), where the …nancial infrastructure had to be recon…gured after the collapse of the centrally planned system. The mainstream consensus is that these countries need a stable and e¢ cient banking system, next to the gradual development of …nancial markets, in order to …nance both private and public investment and expenditures. The e¤ectiveness of the banking system in channelling funds from surplus to de…cit actors is often gauged by examining the spread between lending and deposit rates and by assessing the degree of operational e¢ ciency of the banking industry (Taci and Zampieri, 1998). On both accounts, the CEEC have made some progress since the deregulation of their banking systems, but interest margins remain relatively high and the gap with OECD bank markets remains substantial (Berglöf and Bolton, 2001; Riess et al., 2002; EBRD, 1998). However, the interpretation of relatively high bank interest margins represents a trade-o¤. Figure 1 shows the evolution of average net interest margins over the last decade. On the one hand, high margins are associated with a low degree of e¢ ciency and non-competitive market conditions. On the other hand, relatively high margins may be a re‡ection of an inadequate regulatory banking environment and a high degree of information asymmetry. In such circumstances, high margins would be indicative of high risk premia. If, in this type of environment, competition increases, it might increase gambling behavior of banks who want to maintain their franchise value, causing …nancial instability. Therefore, in less developed economies relatively high bank margins may be necessary, at least temporarily, to sustain bank franchise value and avoid …nancial instability (Gorton and Winton, 1998). Beck et al. (2003), e.g., conclude that highly concentrated banking systems are less likely to su¤er from crises. The weak performance of banks in transition economies can to some extent be explained by the economic and regulatory constraints under which they operate. An essential feature in transition banking is that large information asymmetries exist between borrowers and intermediaries, leading to adverse selection, moral hazard, and weak monitoring incentives (see Pyle, 2002). This information opaqueness has structural causes, e.g. related to the absence of transparent accounting standards or the lack of regulatory enforcement, as well as economic causes, e.g. poor economic growth and volatile in‡ation. The regulatory framework is often underdeveloped and characterized by the dominance of non-market-based rules and a low degree of e¤ective enforcement. In this type of environment, banks have the incentive to restrict competition and exhibit a 2

high degree of operational ine¢ ciency. These ine¢ ciencies would typically be re‡ected in high interest margins. Further, the transition to a market economy has often caused a large proportion of bad loans to appear on the banks’balance sheets and revealed the evidence of inadequate screening and monitoring skills. However, even within a more sophisticated legal setting, banks may still be confronted with incentives to increase lending rates or even ration credit. For example, Hellmann, Murdock and Stiglitz (2000) show that when using just capital requirements as the tool of prudential regulation it is impossible to implement any Pareto-e¢ cient outcome in terms of bank risk taking behavior. Their advocated alternative is the use of deposit-rate ceilings to create franchise value and deter banks from gambling. Schoors and Vander Vennet (2003) identify conditions under which the incentive e¤ects of (non-)binding capital rules will result in a (non-)lending equilibrium. In these cases, systemic stability will be endangered, despite the regulatory framework. The frequent banking crises observed in the CEEC should thus not be solely attributed to shortcomings in the regulatory environment, but require a more integrated analysis. Banking crises create negative externalities since the associated credit squeeze and costly liquidation of investment projects cause real output drops and collapses in asset prices. Since the interest margin is the major determinant of the pro…tability of bank intermediaries, it is important to analyze the e¤ect of changes in both the economic and regulatory environment on these margins. In this paper we analyze the determinants of bank interest margins in the CEEC. The main objective is to determine whether the relatively high interest margins of banks operating in transition economies are caused by economic factors such as an often concentrated market structure and a lack of operational bank e¢ ciency or rather by regulatory factors and underdeveloped banking conditions. If high margins were caused by market power or operational inef…ciency, more competition would be the optimal solution, e.g., by encouraging further foreign bank entry. If high margins were caused by regulatory underdevelopment and asymmetric information, actions in terms of enterprise and bank reform would be a more pressing avenue of policy action. Hence, di¤erent causes call for di¤erent policy actions. Our setup further enables us to assess wether the recently observed decline in margins can be attributed to improved regulations, whereby lower margins re‡ect lower risk and hence indicate more …nancial stability or to a change in market conditions, whereby low margins are the outcome of increased competition.The empirical analysis covers most of the decade of the 1990s, which coincides with the period following the deregulation of the CEEC banking systems. Hence, we are able to assess the e¤ect of deregulation on interest margins. Second, we examine to what extent bank behavior in the CEEC has been converging to patterns observed in Western Europe. This is important for all Eastern European transition countries, but even more for the group of countries that will join the European Union in 2004. These so-called ’accession countries’ have made considerable e¤orts to adapt their legal and …nancial infrastructure 3

to ensure eligibility for EU accession. The expectation is that this process of regulatory and economic harmonization will spur macroeconomic and …nancial convergence with the EU. In that framework it can also be expected that bank behavior will converge. In order to investigate this convergence hypothesis, we provide a systematic analysis of the competing hypotheses for bank interest margins for both the CEEC banks and the banks operating in Western Europe. If we …nd that bank interest margins in West and East are driven by the same factors, this would be evidence supporting convergence. Because of their status of early EU joiners, we perform the analysis separately for the accession countries subsample. This exercise may also yield useful insights into the optimal sequencing of …nancial liberalization and the associated mix of policy implications for the macroeconomic environment, bank market reform and regulatory reform. In what follows, we use panel data estimation techniques to analyze bank interest margins for 36 countries in Western and Eastern Europe. The main …ndings are that concentration, capital adequacy and risk behavior are important determinants of margins in both West and East. Operational e¢ ciency is found to reduce margins in the West and in the Accession countries, but not (yet) in Eastern Europe as a whole. Our results further indicate that the Accession countries’bank markets are gradually converging to Western European levels and that bank reform is a necessary condition for convergence of interest margins. The rest of the paper is organized as follows. Section 2 provides an outline of the di¤erent hypotheses on the determinants of bank interest margins. Section 3 describes the data and the estimation methodology used in the empirical analysis. Section 4 describes and interprets the main results of the regression analysis. Section 5 concludes and provides a number of policy implications.

2

Determinants of bank interest margins

We want to analyze the determinants of bank interest margins in a coherent and encompassing framework in order to assess the importance of micro- and macroeconomic versus regulatory determinants. A basic decomposition of bank interest margins reveals that the relevant determinants can be subdivided into di¤erent types. Let us de…ne the interest margin as the average interest rate charged on the loan portfolio and earned on marketable securities minus the average interest rate paid on the deposit funding. This margin can be decomposed into three components (see Figure 2). The …rst is the transformation margin that banks earn by transforming wholesale deposits into risk-free assets. This margin is associated with the maturity transformation function of …nancial intermediaries and it will depend primarily on the regulatory framework in which banks operate and on the prevailing business cycle conditions. When the regulatory framework is relatively underdeveloped the intermediation margin will be relatively high as a re‡ection of information asymmetries and a lack of trust in nominal claims. When business cycle conditions are unfavorable, the

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intermediation margin will be a¤ected because of default and systemic risk considerations. Second, on the asset side, a bank can increase the average interest rate by granting loans to risky borrowers or by targeting speci…c loan segments in which it assumes to possess a comparative advantage. The level of loan rates that the bank can charge will depend on the riskiness of the borrowers, the degree of market power it posesses in the lending market, and the cost e¢ ciency of its loan business. Third, on the liability side, the bank may be able to attract customer deposit funding at a cost below the interbank deposit rate. Its ability to do so will depend on its access to savings, the market power it can exert in the deposit market, the operating cost of the branch network, and on its own creditworthiness. Based on these considerations we will include four types of variables in our regressions : (1) country-speci…c bank market characteristics, such as the degree of concentration as a proxy for market power, (2) countryspeci…c macroeconomic conditions, such as in‡ation and real economic growth, (3) bank-speci…c characteristics, such as the degree of operational e¢ ciency and capital adequacy, and (4) regulatory features, such as the degree of …nancial and regulatory reform. Previous studies have analyzed bank margins mainly empirically, both for developed and developing countries. One strand of literature has elaborated on the dealership model introduced by Ho and Saunders (1981) who set up a two-step estimation procedure to empirically test their model1 . Based on this empirical approach, Saunders and Schumacher (2000) …nd that interest margins in six European countries and the US over the period 1988-95 are a¤ected by the degree of bank capitalization, bank market structure, and the volatility of interest rates. For seven Latin American countries, Brock and Suarez (2000) report that bank spreads in the 1990s are in‡uenced by liquidity and capital risk at the micro level, and by interest rate volatility, in‡ation and GDP growth at the macroeconomic level, although the results di¤er across countries. One drawback of the Ho and Saunders approach is that, although bank-speci…c variables are used to determine pure bank margins, it ignores the heterogeneity across banks, both within the same market and over di¤erent countries. In this paper we try to deal with bank-speci…c variation within the same country, as well as across countries and over time. An alternative approach found in literature is a more eclectic single-stage regression technique based on a behavioral model of the banking …rm in which various potential determinants of the interest margin are included. DemirgüçKunt and Huizinga (1999) use bank-level data for 80 developed and developing countries over the period 1988-95 to analyze the determinants of bank interest margins and bank pro…tability. Their evidence suggests a role for a large number of indicators next to bank-speci…c variables, such as macroeconomic 1 The …rst step involves the estimation of a ’pure interest spread’ by regressing observed margins on a number of bank-speci…c characteristics. In the second step, the estimated pure spreads are explained by macroeconomic and market structure variables.

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conditions, bank taxation, deposit insurance regulation, overall …nancial structure, and several legal and institutional indicators. Notwithstanding the unique coverage of the dataset they use, the heterogeneity across individual banks is again largely ignored in the regression analysis. Furthermore, in neither of the two approaches has there been an attempt to analyze whether the observed di¤erences in bank margins over countries and over time are primarily caused by di¤erences in factors related to the industrial organization of bank markets (market structure and bank e¢ ciency) or by di¤erences in overall market conditions re‡ected in the regulatory and institutional environment and overall macroeconomic conditions. In our empirical setup we integrate these factors. Our approach is …rmly related to the industrial organization literature on bank structure and e¢ ciency. In a similar way as has been done for overall bank pro…tability, the relationship between bank interest margins and market structure can be analyzed within the structure-conduct-performance (SCP) and the e¢ cient-structure (ES) hypotheses. In the case of overall bank pro…tability, Berger (1995a), Goldberg and Rai (1996), and Vander Vennet (2002) consider four di¤erent explanations that we apply to the case of interest margins. The traditional SCP asserts that the positive relationship between pro…ts and market structure re‡ects non-competitive pricing behavior in more concentrated markets. A second theory is the relative-market-power hypothesis (RMP), which states that only those banks with large market shares are able to exercise market power in pricing and consequently earn higher margins. Berglöf and Bolton (2001) argue that the banking sector in most CEEC is heavily dominated by a few large banks and that these banks are not only able to exert monopoly power in deposit and lending activities, but also often yield considerable political in‡uence. Alternatively, two e¢ ciency explanations may capture the positive relationship between interest margins and either market concentration or market share (Berger (1995a)). The e¢ cient-structure (ES) hypothesis asserts that di¤erences in interest margins are attributable to di¤erences in operational ef…ciency across banks. The X-e¢ ciency version states that banks with superior management or production technologies have lower costs and subsequently can o¤er more competitive interest rates on loans and/or deposits, leading to a negative relationship between operational e¢ ciency and interest margins. Since these …rms are also assumed to gain larger market shares, the market may become more concentrated as a result of competition. Hence, the correlation between market structure and margins is spurious in this case and runs via higher levels of e¢ ciency. One way to deal with this empirically is to include measures for concentration, market share and operational e¢ ciency simultaneously into the regression. The scale-e¢ ciency version of the ES hypothesis allows that some …rms simply produce at a more e¢ cient scale than others, which, under competitive market conditions, will be translated into smaller margins. Again, these …rms are assumed to increase their market share, which would lead to higher market concentration. Our paper is also related to Demirgüç-Kunt, Laeven and Levine (2004) who 6

integrate the analysis of market structure, bank regulation and bank margins in a cross-country setting2 . The authors assess the impact of bank regulation, bank market concentration and in‡ation on bank margins, as well as the role of national institutions in regulation and market structure. They use data over the period 1995-99 for a sample of 72 countries, in order to include banks which operate under distinct regulatory and institutional environments. In examining bank regulations, Demirgüç-Kunt et al. (2004) use the database of Barth, Caprio and Levine (2002), which gives an extensive overview of the existing bank regulatory and supervisory rules around the world. This database is based on a survey conducted over the period 1998-2000 and reveals a very detailed view of the current state of bank regulation in 107 countries. Notwithstanding its large coverage and high degree of detail, the database has the disadvantage that it cannot be used to capture time-variation in the legal and institutional environment. Therefore, in their analysis of bank margins, Demirgüç-Kunt et al. (2004) are compelled to look at the averages over the period 1995-99 of concentration and other measures. In this paper, we maintain the time-series aspect of our data and try to gauge how market structure and market conditions as well as the institutional and regulatory environment a¤ect bank margins. Since we focus on a sample of transition countries and a sample of Western European countries, we are able to exploit the variation in the institutional environments across these countries and over time. This allows a test of the convergence hypothesis.

3 3.1

Data and methodology Data sources

In the empirical analysis we use a sample of over 2000 banks from 36 Western and Eastern European countries over the years 1994-20013 . All bank balance sheet data and income statements are obtained from the BankScope database maintained by Fitch/IBCA/Bureau Van Dijk. Since we focus on bank intermediation, we use unconsolidated statements whenever possible, although in some cases we have to rely on consolidated statements because of data unavailability. The institutional bank types included are commercial banks, savings banks and 2 Sarr (2000) is one of few papers which investigates the role of …nancial liberalisation and bank market structure on bank margins simultaneously. For a sample of annually aggregated US bank data over the period 1934-92, Sarr …nds that if there is not enough market power in the deposit market, deposit mobilization diminishes and reduces …nancial deepening as a result. The nature of the data again overlook bank-speci…c heterogeneity and although changes of …nancial liberalization are taken into account, questions can be raised as to what extent one can extrapolate the results from the US case to developing bank markets. 3 The countries included in our sample are divided into four subsamples: 1) Western Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom; 2) Southern EU: Greece, Portugal, Spain; 3) Accession countries: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, Slovenia; 4) Eastern Europe: Albania, Belarus, Bosnia, Bulgaria, Croatia, Macedonia, Romania, Russia, Ukraine, Yugoslavia and all Accession countries.

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cooperative banks, since these types of banks are primarily engaged in …nancial intermediation. To make sure that we do not omit any banks that are important players in the deposit and/or loan markets, we also include medium and long term credit banks and specialized government institutions, because they remain important in certain countries. All the ratios capturing bank-speci…c characteristics are calculated based on the standardized global accounting format provided by BankScope in order to ensure comparability across countries. Data on in‡ation, GDP growth and stock market capitalization are taken from IFS (IMF International Financial Statistics) and various EBRD Transition Reports. The bank and enterprise reform indicators are obtained from the EBRD Transition Reports (1998, 2001). The …nal dataset consists of an unbalanced panel with more than 16000 observations. All observations more than four standard errors away from the country mean are deleted. Although BankScope is one of the most commonly used databases when dealing with bank characteristics, its coverage di¤ers across countries, especially for the Eastern European countries. However, in all countries, the available banks account for a very large proportion (usually more than 80%) of the deposit and lending activity, on which this paper is focused (see Demirgüç-Kunt and Huizinga (1999), Cunningham (2001)). Table 1 reports the number of banks available in each of the countries and provides evidence on their size distribution.

3.2

Methodology

Our objective is to identify whether the relatively high bank margins observed in the CEEC are primarily driven by market structure and bank-speci…c factors or whether they are caused by shortcomings in the regulatory framework in which the banks operate. Extending Berger (1995a), Allen and Rai (1996) and Vander Vennet (2002), we estimate equations of the following form: N IMi;j;t = f (HERFj;t ; M Si;j;t ; EF Fi;j;t ; SIZEi;j;t ) X X X + Xi;j;t + Yj;t + Rj;t + i;j;t

(1)

where N IMi;j;t is the net interest margin of bank i in country j at time t. The N IMi;j;t is calculated as the di¤erence between interest income and interest expenses as a proportion of total earning assets4 . HERFj;t is the Her…ndahl measure of market concentration, calculated sum of squared marPnj as theloans ket shares in the loan market HERFj;t = i=1 (M Si;j;t )2 . Based on the structure-conduct-performance argument, a positive impact of concentration on bank interest margins would be indicative of collusion. M Si;j;t is a measure of relative market power; M Si;j;t is calculated as bank i’s share of assets at 4 An unbiased measure of the pure intermediation margin would be the di¤erence between lending revenues and deposit costs for each bank, but this data is not available. However, since the other interest income (e.g., on securities) and interest expenses (e.g. on interbank borrowings) can be assumed to re‡ect competitive market conditions across the banks in the sample, our estimate of the interest margin is a good proxy for the intermediation margin.

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time t in country j’s total bank assets at time t. A positive sign would support the relative market power hypothesis, i.e. banks with a relatively high market share are more able to set prices autonomously. The e¢ ciency ratio EF Fi;j;t is calculated as the inverse of total overhead costs to total assets5 for each bank i in country j at time t. The e¢ cient-structure hypothesis predicts a negative relationship between interest margins and e¢ ciency. A measure for bank size, SIZEi;j;t , calculated as the share of total assets of bank i in country j at time t to the assets of the median bank in country j at time t, is intended to capture any scale-related cost or revenue advantages. Early studies on the relation between concentration and bank pro…tability for the US report that, once market share is included in the empirical analysis, the concentration variable loses its explanatory power (see Smirlock 1985). For European banking markets, however, Bourke (1989) and Molyneux and Thornton (1992) …nd a statistically signi…cant positive correlation between concentration and bank returns. Vander Vennet (1994) incorporates an e¢ ciency measure and entry barriers in the model and …nds that collusion is predominant in a number of EU countries. Based on the methodology which combines the market power and e¢ ciency explanations, Goldberg and Rai (1996) fail to …nd a positive relationship between concentration and pro…tability and …nd weak support for the e¢ cient-structure hypothesis for a sample of large banks located in 11 European countries for the period 1988-91. These …ndings are corroborated by those reported in Vander Vennet (2002) for European banks in the 1990s. Equation (1) is augmented with a vector of bank-speci…c characteristics Xi;j;t , a vector of country-speci…c macroeconomic variables Yj;t and a vector Rj;t which contains regulatory variables that may vary across countries and over time. First, we include a number of bank-speci…c control variables that have been shown to be instrumental in explaining bank interest margins. The …rst variable is the degree of bank capital adequacy, captured by CAPi;j;t , the ratio of capital to assets of bank i in country j at time t. When a bank holds excess capital above the regulatory minimum6 , two positive e¤ects on the interest margin can be distinguished. Since the bank has free capital it has the possibility to increase its portfolio of risky assets in the form of loans or securities. When market conditions allow the bank to make additional loans with a bene…cial return/risk pro…le, this will, ceteris paribus, increase their interest margin. Moreover, since capital is considered to be the most expensive form of liabilities in terms of expected return, holding capital above the regulatory minimum is a credible signal of creditworthiness on the part of the bank. When depositors react to this signal and exert ‘depositor market discipline’, this may 5 The cost/assets ratio indicates how much operational costs the bank incurs for managing a given level of assets. We prefer this variable over the commonly used cost/income ratio because the latter contains the net interest margin, the dependent variable we attempt to explain. Moreover, total income also includes non-interest income, which tends to be very volatile and is often unrelated to the core …nancial intermediation business of banks. 6 In principle, all banks in our sample are subject to BIS-type capital adequacy regulations, they are required to hold at least 8% of capital against their risky assets. In some CEEC, capital regulations are more stringent (see Barth et al., 2002).

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enable the bank to lower its deposit funding costs and, hence, increase its interest margin. Empirical evidence of market discipline is reported by Goldberg and Hudgins (2002) and by Park and Peristiani (1998) for the case of US savings and loan associations. Their …ndings indicate that riskier thrifts not only pay higher interest rates on uninsured deposits but also attract a smaller quantity of uninsured deposits. Berger (1995b) provides indirect evidence for the presence of depositor discipline by arguing that it may partly account for the observed positive relationship between capital and earnings of US banks in the 1980s. Peria and Schmukler (1998) …nd evidence that market discipline also exists in developing countries, even in the presence of deposit insurance. In the CEEC, depositors have few alternatives for bank deposits; yet they are regularly confronted with information about bad asset quality in some banks, or even outright bank failures. This feature will induce depositors, especially professional market participants, to act prudently and avoid depositing money in badly capitalized banks. Another well known feature is that depositors switch to supposedly safe banks in times of …nancial crisis. Often, the preferred safe havens are foreign banks, with a more solid capital cushion, or state-owned banks with an explicit guarantee (e.g. the Russian Sberbank during the 1998 crisis). Hence, the degree of capitalization is used as a proxy for all types of arrangements that cause depositors to regard certain banks as ’safer’. Finally, it has been demonstrated that banks with a relatively high degree of capital adequacy are less vulnerable to monetary policy shocks than their less capitalized competitors (Kishan and Opiela, 2000). Our expectation is therefore that a higher degree of capital coverage will be associated with higher interest margins. We include two indicators of the banks’ balance sheet composition in the regressions (see Vander Vennet, 1994; Vander Vennet, 2002). The …rst is the proportion of demand and savings deposits to total deposits (DSDEPi;j;t ). Demand and savings deposits are usually relatively stable and cheap compared to borrowed funds. Hence, a bank with considerable access to this source of funding through a solid local deposit market penetration should be able to maintain high interest margins. The second balance sheet indicator is the proportion of total loans in total assets (LT Ai;j;t ). We expect that a high LT A will be associated with higher interest margins due to risk and cost considerations. A higher LT A should increase revenues since loans are the most risky and, hence, the highest-yielding (in terms of expected return) type of assets. Consequently, LT A is intended to capture the bank’s asset risk. In the CEEC, where the level of lending to households and private enterprises is relatively low, we expect that a high LT A, indicating loan market penetration, will be associated with higher interest margins. Loans are also the type of assets with the highest operational costs because they need to be originated, serviced and monitored. When the bank applies markup pricing for its lending rates, the interest margin will increase. Second, we include Yj;t , a vector of variables intended to capture the macroeconomic environment in which the banks operate. In order to control for 10

country-speci…c macroeconomic conditions, we include real GDP growth, gdpj;t , to proxy for business cycle ‡uctuations, and the in‡ation rate, calculated as the (end of year) change in CPI, inf lationj;t . Boyd et al. (2001) …nd evidence that there exists a strong negative correlation between in‡ation and the amount of bank lending. This suggests that if more lending results in lower lending rates, bank margins will decrease as in‡ation is lower. Hybens and Smith (1999) develop a theoretical model which predicts a positive relationship between economic performance and bank lending. More bank lending may result in higher net interest revenues, and thus higher margins, as long as the volume e¤ect dominates the price e¤ect on lending rates. Finally, we construct a vector of variables Rj;t related to regulatory reform in the CEEC. This will enable us to assess how the changes in regulation of the last decade (e.g., …nancial and bank reform, …nancial market liberalization, the implementation of prudential regulation) have a¤ected bank soundness and …nancial stability in the CEEC. More speci…cally we test how successful the e¤orts aimed at enterprise reform and bank reform have been in reducing bank risk taking behavior and in enhancing overall bank e¢ ciency. To assess the e¤ect of bank reform and market liberalization, we include two indices constructed by the EBRD: the transition indicator for enterprise reform, EBRDetpj;t and the transition indicator for banking reform, EBRDbankj;t . Both indicators provide a ranking of the progress made in liberalization and institutional reform in the enterprise and the bank sector, respectively (EBRD, 1998, 2001)7 . Fries et al. (2002) use these measures to classify 16 transition economies into a high reform and a low reform sample and then investigate bank performance for these two groups. We introduce them directly in our equations and interact them with the other variables to assess how di¤erent levels of reform a¤ect the sensitivity of the N IM with respect to bank-speci…c and market variables. Progress in bank reform towards levels comparable to those in developed bank markets should induce sound banking practices and increase depositor con…dence. A high level of bank reform might therefore increase the net interest margin as deposit rates may decline. However, if a deposit insurance scheme is introduced, depositor discipline might actually decline, which would reduce the need for excess capital, thereby lowering the scope for lending. We expect that the more the level of enterprise reform approximates the institutional standards of a developed economy, the more the problems associated with asymmetric information will be alleviated and the more banks will be willing and able to grant commercial loans to …rms and households. To the extent that the lending volume is su¢ ciently enhanced, this is expected to a¤ect bank interest margins and pro…tability positively. 7 To

measure enterprise reform, the amount of budgetary subsidies, the e¢ ciency of tax collection for social security, the share of industry in total employment and the change in labor productivity in industry are taken into account. To construct the index of bank reform, the number of banks (and the share of foreign owned banks), the asset share of state-owned banks, the percentage of bad loans, credit to the private sector and stock market capitalization are considered (EBRD, 2001).

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3.3

Summary statistics

Table 2 gives an overview of the summary statistics of the variables we use in the empirical analysis. Table 3 presents the correlation structure for the whole sample. From the summary statistics it is clear that, on average, net interest margins in the West are much lower (2.7%) compared to the Accession countries (4.7%) and Eastern European countries (6.5%). Also, margins are much more volatile when moving from West to East. The Her…ndahl index (on a scale between 0 and 1) in the Eastern European sample is on average double the value for the index in the West. The e¢ ciency measure exhibits lower values on average for the East and Accession countries compared to the West and Southern EU. Further, bank markets in the East are characterized by higher levels of in‡ation and volatile GDP growth. The correlation matrix of Table 3 indicates that the variables of interest show a signi…cant correlation with the net interest margin. Some of the correlations between the variables (e.g. market share and concentration) are rather high and might cause some collinearity problems in the regression analysis. We will have to keep this in mind when interpreting the results.

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Empirical Analysis

All the estimations are performed using a Fixed-E¤ects (FE) panel data estimation approach, i.e. we assume that some unobserved heterogeneity between banks exists which might be correlated with the other explanatory variables. If this is the case, the Random-E¤ects (RE) GLS estimator yields biased coe¢ cient estimates. If not, the FE estimator still produces unbiased coe¢ cient estimates, although the GLS estimator would be more e¢ cient. We performed a set of Hausman tests which all rejected the RE hypothesis in favor of the FE hypothesis, except for the Accession countries subsample8 . All the estimated equations include year dummies.

4.1

Bank margins: Bank-speci…c and Macroeconomic conditions

table 4 reports the results for the estimation including measures for concentration, market share, operational e¢ ciency and scale e¢ ciency simultaneously in order to test the relative importance of the SCP and the ES hypotheses. We also include the bank-speci…c control variables CAP , DSDEP , LT A and control for the macroeconomic environment by adding real gdp growth and in‡ation. The …rst regression of table 4 is performed for the full sample of Western and Eastern European banks. The second and third columns show the estimation results for the subsamples Western Europe and Southern EU countries9 . The last column 8 The estimation results remain valid when using the RE assumption. More detailed information on Hausman tests and RE estimation results are available upon request. 9 The countries included are Spain, Portugal and Greece. We consider this subsample because these countries are the most recent EU joiners (1985) and can hence be considered as

12

shows the results for the sample of Eastern European countries as a whole, while the fourth column narrows the subsample of Eastern European countries down to Accession Countries. Since these countries will join the European Union in 2004, it is important to assess whether the determinants of their banks’interest margins have converged to those in Western Europe, and whether they show a similar behavioral pattern as the Southern European countries that were the last EU entrants. The estimation results for the full sample lend support to the SCP hypothesis. Even in the presence of the market share and e¢ ciency variables, the coe¢ cient on HERF is positive and highly signi…cant, indicating that an increase in market concentration has a positive e¤ect on bank margins10 . When we consider the regional subsamples, we observe that the support for the SCP hypothesis is present in both the Western and Eastern European markets, although the e¤ect is much stronger in absolute terms in the Eastern European subsample. In the Southern EU and Accession countries the coe¢ cient on the Her…ndahl index is insigni…cant. This …nding seems unexpected since it is usually assumed that Western European bank markets are competitive, due to extensive e¤orts of …nancial deregulation, regulatory harmonization and the convergence of the monetary and macroeconomic environment11 . However, our …nding only corroborates previous results. De Bandt and Davis (2000) conclude that European bank markets were characterized by monopolistic competition before EMU, while Corvoisier and Gropp (2002) …nd that for loans and demand deposits, increasing concentration in European banking may have resulted in less competitive pricing by banks. For a sample of six European countries and the US, Saunders and Schumacher (2000) also …nd evidence of a non-competitive market structure which materializes in an extra rent above the intermediation spread. For a sample of eight CEEC over the period 1992-96, Gondat-Larralde and Lepetit (2001) …nd a positive relationship between market concentration of banks and their performance, con…rming the SCP hypothesis. The relative market share hypothesis (RMP) does not receive support in any of the samples. The coe¢ cient on M S is insigni…cant for both the developed bank markets and the Accession bank markets. It even has a negative sign in the Eastern European market, a …nding that also appears for the full sample. Since this results is a benchmark case for the new CEEC joiners. 1 0 One potential problem is the calculation of the Her…ndahl index as a proxy for market concentration. When we repeat our estimations from Table 8 using Her…ndahl indices for assets and deposits instead of loans or dropping a measure for concentration altogether, we …nd that our conclusions remain unaltered. When we rede…ne the Accession countries sample such that it only includes Poland, the Czech Republic and Hungary (countries which are widely assumed to be most representative for the Accession countries), our results with respect to the concentration measure do change. We …nd a substantial concentration e¤ect on margins when we only focus on the Czech Republic, Hungary and Poland. A possible explanation for this result could be the large presence of foreign banks in these markets, which have accelerated the consolidation progress in the banking market. 1 1 Milestones in the bank market integration process are the Second Banking Directive (1989), the Single Market Program (1993), the harmonization of capital adequacy rules through various directives, and the introduction of the euro (1999).

13

clearly driven by the non-Accession Eastern European bank markets, a possible explanation could be that large banks are still (partially) government owned and still grant loans at arti…cially low interest rates. Combined, the results indicate that it is mainly the structure of Eastern European bank markets as such that has an in‡uence on the interest margin, rather than the abuse of a dominant market position by some banks. It is generally accepted that the concentration e¤ect can be attenuated by promoting competition, e.g. through foreign entry. The coe¢ cient on the e¢ ciency ratio, albeit small in absolute terms, enters the equations negatively and is highly signi…cant for the full sample, supporting the e¢ cient structure hypothesis. For a sample of 5 transition economies, Gondat-Larralde and Lepetit (2001) …nd that higher levels of e¢ ciency improve bank pro…tability. This result is also in line with Vander Vennet (2002) who …nds that higher e¢ ciency reduces interest margins signi…cantly in a sample of Western European countries. In accordance with theory, a higher operational ef…ciency induces banks to pass the lower costs on to their customers in the form of lower loan rates and/or higher deposit rates, thereby lowering the interest margin. The estimates for the subsamples indicate that this e¤ect is present in both the Western and Accession countries’bank markets, but not (yet) in the Eastern European bank sector as a whole. The …nding that M S is insigni…cant implies that this behavior holds for all banks, also for the largest ones. The coe¢ cient of the SIZE variable is always negative but insigni…cant12 . This would imply the absence of any systematic scale-related advantage for either small or large banks. We now consider the bank-speci…c control variables. A noteworthy feature is the role of bank capital. The capital-to-assets ratio enters both regressions positively and is strongly signi…cant (see also Brock and Suarez (2000), Saunders and Schumacher (2000) and Demirgüç-Kunt et al. (2004)). This …nding is consistent with the interpretation that capital serves as a signal of the banks’ creditworthiness in both the Western and Eastern European bank markets. In the Eastern European bank markets and Accession countries, however, the capital ratio has a coe¢ cient at least twice as large compared to that reported for Western European banks. The most likely explanation for this sizeable e¤ect can be found in the existence of a considerable degree of depositor discipline in transition banking, which may decrease the deposit cost of well capitalized banks, leading to higher interest margins. This …nding also suggests that Eastern European banks may be able to use the excess capital to engage in more pro…table lending activities, which would also increase interest margins13 . The estimated coe¢ cient for the variable capturing the deposit composition of bank funding is positive and signi…cant, although economically negligible, 1 2 The high correlation with market share may be an issue of concern. However, once we re-estimate the equation without the SIZE variable, our results remain unchanged. 1 3 There is serious doubt, however, whether this is generally the case in all CEEC, see e.g. Taci and Fries (2002) and Ries et al. (2002).

14

in the Western European bank sector. This means that the comparative advantage of having access to a local and stable pool of deposits is not a major driver of interest margins, presumably because there is competition for deposits in Western Europe or because alternative funding sources are widely available. However, for the Eastern European bank markets and the Accession countries, DSDEP has a positive and highly signi…cant coe¢ cient, indicating that having access to a stable and relatively cheap source of deposit funding translates into a distinct advantage in terms of realized interest margins. Having a large proportion of savings deposits may be a signal of the relatively high degree of trust that depositors have in the bank, but it may also be a re‡ection of service convenience (e.g., through a branch network) or the presence of high switching costs. The LT A ratio has a positive and signi…cant e¤ect on the N IM , albeit more pronounced in the Southern EU, Accession and Eastern European bank markets. Since loans are the most risky asset class, this …nding supports the hypothesis that more lending results in wider margins, re‡ecting the bank’s increased exposure to default risk. The fact that the coe¢ cient is much larger in absolute terms in Eastern European bank markets and Accession countries (and to a lesser extent also in Southern Europe) indicates that a substantial part of the interest margin in transition banking can be considered as a compensation for risk taking. Finally, we interpret the coe¢ cients on the macroeconomic variables. Adding the GDP growth variable to the estimation shows how the N IM signi…cantly depends on the prevailing economic conditions. The positive association between the business cycle and bank margins is mainly a characteristic of the Western European bank markets. For these markets, higher economic growth is associated with higher margins, as a re‡ection of more lending and lower default rates. In Eastern Europe no such relationship is found; the coe¢ cient on economic growth is negative and signi…cant. This can be explained by the volatility of the business cycle and shows how economic uncertainty and asymmetric information may help to keep margins low. The positive coe¢ cient on in‡ation, both in Western and Eastern European bank markets, Southern Europe excepted, supports the hypothesis that disin‡ation has a negative e¤ect on net interest margins. This corroborates the hypothesis that lower in‡ation (and decreasing in‡ation expectations) have a more pronounced downward e¤ect on long-term compared to short-term interest rates, leading to declining margins.

4.2

Bank margins: Regulatory and Institutional properties

One of our objectives is to investigate the e¤ect of regulatory reform in Eastern European countries on bank interest margins and pro…tability. One way of doing this is by introducing indices of bank and enterprise reform in our equation14 . 1 4 These indicators provide a ranking of the progress of liberalization and institutional reform of the enterprise and bank sector, respectively. We refer to the EBRD Transition Reports for the various indicators.

15

The results are shown in columns 1 and 3 of Tables 9 and 10 for Accession countries and Eastern European countries, respectively. When entered directly into the equation, the EBRD index for bank reform (EBRDbank) is never signi…cant. This could be the net result of the ambiguous nature of the e¤ect of bank reform on bank margins, since sound banking may spur lending, but it may also cause weaker depositor discipline. The EBRD index on enterprise reform (EBRDetp) is signi…cantly positive for Eastern European bank markets, indicating that as asymmetric information problems decline, banks are more willing to grant loans (as their expected income will increase), which leads to higher margins and pro…tability. This …nding stresses the prime importance of policy measures to diminish the asymmetric information problems of adverse selection and moral hazard in transition banking (see Schoors and Vander Vennet, 2003).

From our previous results we inferred that operational ine¢ ciency and risk taking behavior are important determinants of high margins in Accession countries and that capital plays an important signalling role in banks’creditworthiness. But how does the stance of enterprise and bank reform in‡uence these e¤ects? To provide an answer to these questions, the bank market and bankspeci…c variables are interacted with the two reform indices to test wether reforms put bank behavior and bank margins more on a Western European track. By including interaction terms we can test wether di¤erent levels of enterprise and bank reform make the N IM more sensitive to bank-speci…c and market variables. The results are reported in columns 2 and 4 of Tables 9 and 10. For transition bank markets, the main …nding in table 5 is that the more e¤ort a country puts into bank reform, the more the role of capital in banks converges to the one in Western Europe; bank reform progress reduces the e¤ect of capital as a signal of a bank’s creditworthiness. This suggests that, in the absence of a solid legal framework, a su¢ cient capital bu¤er is needed to function as a credible signal to depositors. In such an environment the notion of capital adequacy might become innocuous in the sense that what is revealed on the balance sheet conveys little about a bank’s real capital adequacy. Holding capital in excess of what is required is then often the only solution to signal solvency and inspire depositor trust. Once the legal environment is improved, the ’credible amount’ of capital can be reduced, i.e. less capital is needed to signal creditworthiness as depositor con…dence grows. The interaction terms with HERF suggest that in the Eastern European bank markets the positive e¤ect of concentration converges more to Western European levels as bank reform improves. This is in line with Demirgüç-Kunt et al. (2003) who …nd that once they control for regulatory change, the positive relation between the Her…ndahl index and margins breaks down. The e¤ects of enterprise reform reinforce some of the above assertions (see table 6). In the Accession countries, both interaction terms with DSDEP and LT A enter the equation negatively, which indicates that it becomes more di¢ cult for banks to maintain their local market power to impose low deposit rates and high loan rates once the corporate 16

sector becomes more competitive and transparent. This is also consistent with Fries et al. (2002) who …nd that in countries with a signi…cant progress in bank and enterprise reform, there is no evidence of excessive risk taking by banks.

4.3

Convergence to the West?

On the basis of the results of the empirical analysis we are able to assess to what extent bank markets in the transition economies of Central and Eastern Europe have converged to Western European standards. For the purposes of this exercise, we de…ne convergence of the transition bank markets to the West as the extent to which the regression coe¢ cients found for the behavioral determinants of bank margins are ’close’to those for the Western European sample. We especially focus on the variables related to market power, operational e¢ ciency and various bank-speci…c characteristics. Tables 8-10 reveal that there is evidence of a convergence path running from ’East’ over ’Accession’ to ’Southern EU’ and ’West’. The concentration measure HERF is positive and signi…cant in the subsamples West and East, but the coe¢ cient is much larger in East. In the Accession sample, the coe¢ cient is economically much closer to the one observed in West. For the M S variable the coe¢ cient for Accession is situated between East and West. More importantly, we …nd that operational e¢ ciency (EF F ) is an important determinant for bank interest margins in West, Southern EU and Accession, but not (yet) in Eastern Europe as a whole. In the Accession countries, the e¤ect of e¢ ciency on margins closely follows the e¤ect found in the West. This suggests that there is convergence taking place of banking technology and skills towards Western European levels. For the Eastern European bank market, convergence is still more remote. The degree of operational e¢ ciency is even insigni…cant in these markets. Another noteworthy convergence result is related to the role of capital. Due to changes in the regulatory environment in the CEEC, asymmetric information is reduced, whereby the role of excess capital as a signaling device for bank creditworthiness is somewhat mitigated. This is re‡ected by the …nding that the coe¢ cient on the capital-to-asset ratio for the East subsample is at least two times higher than in the West, with the Accession countries somewhere in between. But once we control for bank reform, the e¤ect of capital on margins is signi…cantly reduced in both Accession and Eastern European countries. A similar e¤ect can be detected in the Accession countries through the impact of enterprise reform on the coe¢ cient on demand and savings deposits and the loans-to-assets ratio; both coe¢ cients become economically smaller once more reform has been realized. In general, Accession countries show a gradual convergence to the West, while the Eastern European bank market as a whole is still lagging behind in terms of bank market convergence.

17

5

Conclusion

In this paper we investigate the determinants of bank interest margins in Central and Eastern European countries (CEEC). We try to assess to what extent the weak performance of banks in many transition economies can be attributed to a low degree of e¢ ciency and non-competitive market conditions on the one hand, or to the shortcomings in the regulatory environment and a high degree of information asymmetry on the other hand. To this end we investigate the role of both economic factors, such as the market structure and operational bank e¢ ciency, as well as regulatory factors related to bank and enterprise reform. This also enables us to assess whether regulatory changes over the last decade have a¤ected bank behavior and …nancial soundness in the CEEC. We provide a systematic comparative analysis of the determinants of the interest margins of CEEC banks versus banks operating in developed Western European economies. This enables us to assess to what extent the transition bank markets in the CEEC have converged to the West. Our main …ndings are that (1) the structure-conduct-performance (SCP) hypothesis cannot be rejected in either Western or Eastern European bank markets; (2) capital adequacy is an important determinant of bank margins, both in developed and transition bank markets; (3) progress in bank reform reduces the signalling strength of capital as an indicator of bank solvency; (4) lending risk plays an important role in explaining high interest margins, but as reform in the corporate sector improves this e¤ect becomes smaller and (5) higher operational e¢ ciency is re‡ected in lower interest margins in both Western European bank markets and Accession countries, but not (yet) in the Eastern European bank sector as a whole. We …nd that in the Accession countries convergence in the determinants of bank interest margins to Western Europe is gradually taking place. These results imply a number of policy implications in terms of progress in the reform agenda, reducing the degree of asymmetric information in transition economies and the e¤ect of competition on bank e¢ ciency, bank behavior, and bank interest margins.

6

References

Allen, Linda, and Anoop Rai, 1996, Operational e¢ ciency in banking: An international comparison, Journal of Banking and Finance, 20, May, 655-672. Barth, James R., Caprio, Gerard. and Ross Levine, 2002,. Bank Regulation and Supervision: What Works Best?, NBER Working Paper No. 9323. Beck, Thorsten, Asli Demirgüç-Kunt and Ross Levine, 2003, Bank Concentration and Crises, NBER Working Paper No. 9921. Berger, Allen N., 1995a, The pro…t-structure relationship in banking: Tests of market-power and e¢ cient-structure hypotheses, Journal of Money, Credit and Banking, 27, May, 404-31. Berger, Allen N., 1995b, The relationship between capital and earnings in banking, Journal of Money, Credit and Banking, 27, May, 432-56. Berglöf, Erik and Patrick Bolton, 2001, The great divide and beyond: Fi-

18

nancial architecture in transition, Journal of Economic Perspectives, Winter, 16(1), 77-100. Bourke, P., 1989, Concentration and other determinants of bank pro…tability in Europe, North America and Australia, Journal of Banking and Finance, 13, 65-79. Boyd, John H., Ross Levine and Bruce D. Smith, 2001, The impact of in‡ation on …nancial sector performance, Journal of Monetary Economics, 47, 221-248. Brock, Philip L. and Liliana R. Suarez, 2000, Understanding the behavior of bank spreads in Latin America, Journal of Development Economics, 63, 113-134. Corvoisier, Sandrine and Reint Gropp, 2002, Bank concentration and retail interest rates, Journal of Banking and Finance, 26, 2155-2189. Cunningham, A., 2001, Assessing the stability of emerging market economies’ banking systems, Financial Stability Review, 11, December, 187-192. De Bandt, Olivier and Philip E. Davis, 2000, Competition, contestability and market structure in European banking sectors on the eve of EMU, Journal of Banking and Finance, 24(6), June, 1045-1066. Demirgüç-Kunt, Asli and Harry Huizinga, 1999, Determinants of commercial bank interest margins and pro…tability: some international evidence, World Bank Economic Review 13 (2), 379-408 Demirgüç-Kunt, Asli, Laeven, Luc and Ross Levine, 2004, Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation, Journal of Money, Credit and Banking, forthcoming. EBRD, 1998, Transition Report. Financial sector in transition, London, European Bank for Reconstruction and Development. EBRD, 2001, Transition Report: Energy in transition, London, European Bank for Reconstruction and Development. Fries, Steven, Damien Neven and Paul Seabright, 2002, Bank Performance in Transition Economies, EBRD Working Paper.No. 76. Goldberg, Lawrence G. and Anoop Rai, 1996, The structure-performance relationship for European banking, Journal of Banking and Finance, 20(4), May, 745-771. Goldberg, Lawrence G. and Sylvia C. Hudgins, 2002, Depositor discipline and changing strategies for regulating thrift institutions, Journal of Financial Economics, 63(2), February, 263-274. Gondat-Larralde, Céline and Laetitia Lepetit, 2001, The Impact of Market Structure and E¢ ciency on Bank Pro…tability: An Empirical Analysis of Banking Industries in Central and Eastern Europe, in: Financial and Monetary Integration in the New Europe. Convergence between the European Union and Central and Eastern Europe, eds. Dickinson D.G. and A.W. Mullineux, 2001. Gorton, Gary and Andrew Winton, 1998, Banking in Transition Economies: Does E¢ ciency Require Instability? Journal of Money, Credit, and Banking 30(3), Part 2, August, 621–650. Hellmann, Thomas F., Kevin C. Murdock and Joseph E. Stiglitz, 2000, Liberalization, moral hazard in banking, and prudential regulation: Are capital requirements enough?, American Economic Review, 90(1), March, 147-165. 19

Ho, T. and A. Saunders, 1981, The determinants of bank interest margins: Theory and empirical evidence, Journal of Financial and Quantitative Analysis, 16, 581-600. Huybens, Elisabeth and Bruce Smith, 1999, In‡ation, …nancial markets and long-run real activity, Journal of Monetary Economics, 43, 283-315. Kishan, Ruby P. and Timothy P. Opiela, 2000, Bank size, bank capital, and the bank lending channel, Journal of Money, Credit, and Banking, 32(1), February, 121-141. Levine, Ross and Sara Zervos, 1998, Stock markets, banks, and economic growth, American Economic Review, June, 88(3), 537-558. Molyneux, P. and J. Thornton, 1992, Determinants of European Bank profitability: a note, Journal of Banking and Finance, 16, 1173-1178. Park, Sangyun and Stavros Peristiani, 1998, Market discipline by thrift depositors, Journal of Money, Credit, and Banking, 30(3), Part I, August, 347-364. Peria, M.S.M. and Schmukler, S.L., 1998, Do Depositors Punish Banks for Bad Behavior? Market Discipline in Argentina, Chile, and Mexico. World Bank Paper 2058. December 1998. Washington DC. Pyle, William, 2002, Overbanked and credit-starved: a paradox of the transition, Journal of Comparative Economics, 30, 25-50. Riess, Armin, Rien Wagenvoort and Peter Zajc, 2002, Practice makes perfect: A review of banking in Central and Eastern Europe, European Investment Bank Papers, 7(1), 31-53. Sarr, Abdourahmane, 2000, Financial Liberalization, Bank Market Structure, and Financial Deepening: An Interest Margin Analysis, IMF Working Paper, WP/00/38. Saunders, Anthony and Liliana Schumacher, 2000, The determinants of bank interest margins: An international study, Journal of International Money and Finance, 19, 813-832. Schoors, Koen and Rudi Vander Vennet, 2003, Rules versus discipline : Capital adequacy rules, monitoring incentives, and bank behavior in transition economies, Ghent University. Smirlock, M., 1985, Evidence on the nonrelationship between concentration and pro…tability in banking, Journal of Money, Credit and Banking, February, 69-83. Taci, Anita and Emilia Zampieri, 1998, E¢ ciency in the Czech Banking sector, CERGE-EI Discussion Paper No. 4/98, Charles University, Prague. Taci, Anita and Steven Fries, 2002, Banking Reform and Development in Transition Economies, European Bank for Reconstruction and Development, Working Paper No. 71. Vander Vennet, Rudi, 1994, Concentration, e¢ ciency and entry barriers as determinants of bank pro…tability, Journal of International Financial Markets, Institutions and Money, 4(3-4), 21-46. Vander Vennet, Rudi, 2002, Cost and pro…t e¢ ciency of …nancial conglomerates and universal banks in Europe, Journal of Money, Credit and Banking, 34(1), February, 254-282.

20

21

No. of banks 3 112 8 51 9 17 34 18 81 4 5 294 188 11 22 6 27 304 16 7 89 9 37 34 30 21 12 54 14 16 131 14 217 100 20 8

mean(assets) 160,0 2128,6 258,4 5271,5 57,2 193,9 290,4 2557,0 636,4 788,0 22315,4 5568,7 8349,4 6868,6 949,3 990,3 5869,5 2451,9 150,7 240,9 3886,2 102,9 6809,0 2496,7 1642,4 5276,4 277,7 398,0 926,6 648,1 3835,7 16472,7 1738,4 9332,4 136,3 246,6

min(assets) 2,4 14,8 5,3 14,2 3,5 0,8 4,1 11,4 2,7 12,2 404,8 12,1 2,0 62,2 22,0 85,2 11,6 3,4 3,4 7,9 26,0 8,2 25,9 43,2 10,3 48,6 4,3 0,1 29,9 56,1 4,8 162,5 6,8 7,8 5,3 1,8

max(assets) 1322,2 53948,7 1180,7 176908,8 380,6 1396,9 4273,9 18709,6 30051,8 4619,0 215852,0 231230,0 173567,1 47845,2 8561,2 3834,1 63717,0 100262,1 1168,5 1737,2 48885,3 657,2 179720,0 27318,5 22584,2 61024,9 3208,5 6953,4 4718,9 5413,5 79610,0 79949,6 161886,0 238416,6 1139,0 891,4

sd(assets) 329,0 5783,8 284,2 18976,0 59,6 283,8 551,7 4108,9 1890,4 1040,9 41677,3 17783,5 23036,2 10262,0 1403,2 992,5 10741,3 6297,5 211,5 364,8 6624,9 144,9 19859,2 4889,8 3165,3 9304,1 473,4 810,4 1299,2 913,7 7730,0 22982,8 7160,4 28210,8 200,4 255,2

p25(assets) 24,1 176,4 41,5 209,4 20,3 32,7 48,2 312,1 78,0 116,8 1598,0 413,0 232,3 382,8 191,9 268,9 1108,7 172,0 33,3 32,4 384,5 19,4 490,2 334,3 144,4 536,2 36,0 39,1 167,5 144,1 338,4 1257,5 95,9 234,5 23,1 47,3

median (assets) 56,9 367,7 178,3 673,3 36,5 92,0 113,1 710,0 182,6 281,2 7555,3 1598,5 678,0 1425,6 462,8 615,7 2209,7 521,0 89,4 74,1 1011,9 40,0 1740,2 881,0 325,0 1570,2 84,9 103,8 458,7 287,8 1492,0 3240,2 216,7 966,1 47,2 176,9

Note: Data taken from Bankscope. All variables are averaged over the years 1994-2001 and are expressed in euro.

country Albania Austria Belarus Belgium Bosnia Bulgaria Croatia Czech Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Italy Latvia Lithuania Luxembourg Macedonia Netherlands Norway Poland Portugal Romania Russia Slovakia Slovenia Spain Sweden Switzerland UK Ukraine Yugoslavia

Table 1: Average number of banks per country (1994-2001) and distribution of assets p75(assets) 109,3 1108,8 346,6 2051,4 71,1 215,6 258,0 1707,6 432,2 987,6 24903,7 4317,2 3099,0 10316,6 1226,7 1340,9 4282,9 1807,7 165,8 310,8 4164,3 108,9 4711,8 2179,2 1490,7 4711,3 338,8 309,3 777,0 757,5 3923,9 34143,4 792,7 3774,1 131,9 267,0

22

Eastern European Sample Obs Mean Std. Dev. 2384 0.065 0.077 2384 0.179 0.1 2384 0.051 0.095 2306 31.207 64.694 2384 2.798 5.313 2384 0.178 0.14 1087 0.563 0.292 2384 0.414 0.182 2384 0.028 0.061 2381 0.332 0.705 2384 2.4 0.58 2384 2.63 0.71

Accession Countries Sample Obs Mean Std. Dev. 1019 0.047 0.033 1019 0.167 0.066 1019 0.058 0.091 999 42.949 93.485 1019 2.847 5.153 1019 0.125 0.099 615 0.444 0.253 1019 0.427 0.179 1019 0.039 0.025 1019 0.11 0.076 1019 2.92 0.27 1019 3.18 0.37

Variable Net Interest Margin Her…ndahl Index Market Share E¢ ciency Size Capital to Assets Demand and Savings Ratio Loans to Assets GDP growth In‡ation EBRDetp EBRDbank

Note: Data taken from Bankscope.

Western European Sample Obs Mean Std. Dev. 13628 0.027 0.026 13637 0.089 0.068 13637 0.008 0.032 13032 82.494 182.574 13637 5.59 18.988 13637 0.104 0.104 11839 0.613 0.325 13637 0.499 0.26 13637 0.026 0.016 13637 0.02 0.011

Full Sample Mean Std. Dev. 0.033 0.04 0.103 0.08 0.014 0.05 74.783 171.133 5.174 17.666 0.115 0.113 0.609 0.322 0.486 0.251 0.026 0.027 0.067 0.294

Obs 16012 16021 16021 15338 16021 16021 12926 16021 16021 16018

Variable Net Interest Margin Her…ndahl Index Market Share E¢ ciency Size Capital to Assets Demand and Savings Ratio Loans to Assets GDP growth In‡ation

Table 2: Summary Statistics Southern European Sample Obs Mean Std. Dev. 1289 0.036 0.039 1298 0.072 0.056 1298 0.016 0.045 1264 76.884 199.601 1298 2.75 5.345 1298 0.137 0.19 1002 0.448 0.219 1298 0.487 0.232 1298 0.034 0.008 1298 0.033 0.013

23

Note: Data taken from Bankscope.

GDP growth In‡ation

Net Interest Margin Her…ndahl Index Market Share E¢ ciency Size Capital to Assets Demand and Savings ratio Loans to Assets GDP growth In‡ation

1 -0.3099

GDP growth

Net Interest Margin 1 0.1359 0.0776 -0.1597 -0.0966 0.2810 0.1473 0.0549 -0.1155 0.2094

1

In‡ation

1 0.3914 -0.0051 -0.0193 0.0959 0.01 -0.0471 0.0249 0.2844

Her…ndahl Index

1 0.0091 0.2086 -0.0577 -0.0347 -0.0430 0.0520 0.1366

Market Share

1 0.0699 -0.0989 -0.2084 -0.0779 0.1132 -0.0452

E¢ ciency

1 -0.1406 -0.0841 0.01 -0.0283 -0.0223

Size

Table 3: Correlation matrix for the Full Sample

1 0.1354 -0.1892 -0.0439 0.0928

Capital to Assets

1 0.1536 -0.2109 0.0144

Demand and Savings ratio

1 -0.0454 -0.0834

Loans to Assets

Table 4: Bank margins: Bank-speci…c and Macroeconomic conditions Constant HERF MS EFF SIZE CAP DSDEP LTA in‡ation gdp Observations Number of banks R-squared

Full sample 0.0049*** [0.0014] 0.0628*** [0.0048] -0.0252*** [0.0079] -2.269e-05*** [2.980e-06] -6.14E-06 [4.244e-05] 0.0795*** [0.0035] 0.0034*** [0.0010] 0.0110*** [0.0018] 0.0782*** [0.0041] -0.0636*** [0.0120] 12493 2211 0.16

West 0.0178*** [0.0009] 0.0152*** [0.0032] -0.0049 [0.0064] -2.523e-05*** [1.860e-06] 3.66E-06 [2.484e-05] 0.0533*** [0.0023] 0.0002 [0.0006] 0.0070*** [0.0011] 0.1425*** [0.0145] 0.0816*** [0.0099] 11420 1962 0.16

Southern EU 0.0351*** [0.0045] -0.0187 [0.0179] 0.0254 [0.0227] -4.789e-05*** [3.559e-06] -3.89E-05 [1.816e-04] 0.0657*** [0.0046] 0.0016 [0.0019] 0.0206*** [0.0028] -0.0984* [0.0582] -0.1919** [0.0927] 999 187 0.49

Accession 0.007 [0.0170] -0.071 [0.0698] -0.0424 [0.0494] -2.458e-05* [1.362e-05] -1.56E-05 [6.375e-04] 0.1579*** [0.0240] 0.0308*** [0.0087] 0.0540*** [0.0117] 0.1432*** [0.0350] -0.0874* [0.0509] 610 130 0.33

East -0.0057 [0.0144] 0.1629*** [0.0325] -0.0720** [0.0340] -2.56E-05 [2.142e-05] -2.69E-04 [7.564e-04] 0.1556*** [0.0220] 0.0311*** [0.0091] 0.0487*** [0.0145] 0.0398*** [0.0136] -0.1962*** [0.0542] 1073 249 0.26

Note: The dependent variable is bank net interest rate margin. We use FE estimation methods. The explanatory variables are the Her…ndahl index, market share, e¢ ciency and size. The control variables are the capital-to-assets ratio, the share of demand and savings deposits in total deposits, the loans-to-assets ratio, yearly change in gdp and in‡ation. Coe¢ cients of the time dummies are omitted from the output. Standard errors are given in brackets. *, ** and *** indicate signi…cance levels of 10, 5 and 1 percent, respectively.

24

Table 5: Bank reform and bank interest rate margins Constant HERF MS EFF SIZE CAP DSDEP LTA gdp in‡ation EBRDbank

Accession -0.0425 [0.0303] -0.0552 [0.0707] -0.0415 [0.0494] -2.377e-05* [1.362e-05] -4.85E-05 [6.375e-04] 0.1576*** [0.0239] 0.0299*** [0.0087] 0.0548*** [0.0117] -0.1043** [0.0525] 0.1358*** [0.0354] 0.0097 [0.0074]

HERF*EBRDbank MS*EBRDbank EFF*EBRDbank SIZE*EBRDbank CAP*EBRDbank DSDEP*EBRDbank LTA*EBRDbank Observations Number of banks R-squared

610 130 0.33

Accession -0.0157 [0.0149] -1.0686*** [0.2454] 0.5059** [0.2103] -1.60E-04 [2.219e-04] -0.0074* [0.0040] 1.1353*** [0.2341] 0.0654 [0.0630] 0.0415 [0.0765] -0.1241** [0.0523] 0.1411*** [0.0360]

0.3340*** [0.0768] -0.1767** [0.0708] 4.40E-05 [7.145e-05] 0.0023* [0.0013] -0.3199*** [0.0756] -0.0129 [0.0199] 0.0049 [0.0238] 610 130 0.38

East 0.0013 [0.0255] 0.1620*** [0.0326] -0.0711** [0.0341] -2.60E-05 [2.146e-05] -2.65E-04 [7.569e-04] 0.1559*** [0.0220] 0.0313*** [0.0091] 0.0487*** [0.0145] -0.1950*** [0.0543] 0.0401*** [0.0136] -0.0026 [0.0080]

1073 249 0.26

East -0.0225* [0.0119] 0.5431*** [0.1275] -0.2005 [0.1310] -4.25E-04 [3.265e-04] -0.005 [0.0037] 0.5373*** [0.1254] -0.0526 [0.0503] -0.058 [0.0648] -0.1510*** [0.0552] 0.0413*** [0.0135]

-0.1713*** [0.0503] 0.0572 [0.0528] 1.28E-04 [1.051e-04] 0.0016 [0.0013] -0.1304*** [0.0441] 0.0292* [0.0170] 0.0394* [0.0216] 1073 249 0.29

Note: The dependent variable is bank net interest rate margin. We use FE estimation methods. The explanatory variables are the Her…ndahl index, market share, e¢ ciency and size. The control variables are the capital-to-assets ratio, the share of demand and savings deposits in total deposits, the loans-to-assets ratio, yearly change in gdp and in‡ation. EBRDbank is the transition index of bank reform. Coe¢ cients of the time dummies are omitted from the output. Standard errors are given in brackets. *, ** and *** indicate signi…cance levels of 10, 5 and 1 percent, respectively.

25

Table 6: Enterprise reform and bank interest rate margins Constant HERF MS EFF SIZE CAP DSDEP LTA gdp in‡ation EBRDetp

Accession -0.0156 [0.0313] -0.0809 [0.0707] -0.0475 [0.0498] -2.469e-05* [1.363e-05] 5.65E-05 [6.432e-04] 0.1579*** [0.0240] 0.0306*** [0.0087] 0.0556*** [0.0119] -0.1018* [0.0536] 0.1573*** [0.0387] 0.0078 [0.0091]

HERF*EBRDetp MS*EBRDetp EFF *EBRDetp SIZE*EBRDetp CAP*EBRDetp DSDEP*EBRDetp LTA*EBRDetp Observations Number of banks R-squared

610 130 0.33

Accession -0.016 [0.0150] -1.0869*** [0.2171] 0.122 [0.1979] -3.928e-04* [2.270e-04] -0.0122* [0.0062] 0.1678 [0.2591] 0.1709*** [0.0537] 0.4421*** [0.0807] -0.0755 [0.0539] 0.1572*** [0.0412]

0.3702*** [0.0734] -0.0648 [0.0732] 1.20E-04 [7.315e-05] 0.0041* [0.0021] -0.0078 [0.0908] -0.0471*** [0.0182] -0.1334*** [0.0278] 610 130 0.39

East -0.0582** [0.0282] 0.1708*** [0.0326] -0.0794** [0.0341] -2.58E-05 [2.137e-05] -1.47E-04 [7.568e-04] 0.1576*** [0.0220] 0.0283*** [0.0092] 0.0491*** [0.0144] -0.2102*** [0.0544] 0.0413*** [0.0136] 0.0213** [0.0099]

1073 249 0.26

East 0.002 [0.0157] 0.1372 [0.1608] 0.0633 [0.1741] -4.45E-04 [3.340e-04] -0.0115*** [0.0038] 0.2766*** [0.1059] 0.0281 [0.0440] -0.0297 [0.0739] -0.1944*** [0.0566] 0.0410*** [0.0136]

0.0093 [0.0753] -0.074 [0.0791] 1.35E-04 [1.077e-04] 0.0044*** [0.0015] -0.0488 [0.0433] 0.0006 [0.0167] 0.0287 [0.0272] 1073 249 0.27

Note: The dependent variable is bank net interest rate margin. We use FE estimation methods. The explanatory variables are the Her…ndahl index, market share, e¢ ciency and size. The control variables are the capital-to-assets ratio, the share of demand and savings deposits in total deposits, the loans-to-assets ratio, yearly change in gdp and in‡ation. EBRDetp is the transition index of enterprise reform. Coe¢ cients of the time dummies are omitted from the output. Standard errors are given in brackets. *, ** and *** indicate signi…cance levels of 10, 5 and 1 percent, respectively.

26

Figure 1: Average net interest margin in Accession countries, Western and Eastern Europe and Southern EU (1994-2001). NIM Accession NIM W estern Europe

NIM Eastern Europe NIM Southern Europe

.1

0 1994

1995

1996

1997

1998 year

27

1999

2000

2001

Figure 2: Determinants of bank interest margins

Loan rate

Concentration Market power Risk Efficiency

Government bond yield

Net Interest Margin

Intermediation margin

Financial development Regulatory framework Business cycle conditions

Interbank deposit rate Market power Capital adequacy Access to savings Efficiency Deposit rate

28

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K. DE WULF, G. ODEKERKEN-SCHRÖDER, The influence of seller relationship orientation and buyer relationship proneness on trust, commitment, and behavioral loyalty in a consumer environment, January 2000, 27p.(published as ‘Investments in consumer relationships: a cross-country and cross-industry exploration’, Journal of Marketing, 2001)

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R. VANDER VENNET, Cost and profit efficiency of financial conglomerates and universal banks in Europe., February 2000, 33 p. (published in Journal of Money, Credit, and Banking, 2002)

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J. BOUCKAERT, Bargaining in markets with simultaneous and sequential suppliers, April 2000, 23 p. (published in Journal of Economic Behavior and Organization, 2002)

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N. HOUTHOOFD, A. HEENE, A systems view on what matters to excel, May 2000, 22 p.

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D. VAN DE GAER, E. SCHOKKAERT, M. MARTINEZ, Three meanings of intergenerational mobility, May 2000, 20 p. (published in Economica, 2001)

00/85

G. DHAENE, E. SCHOKKAERT, C. VAN DE VOORDE, Best affine unbiased response decomposition, May 2000, 9 p. (forthcoming in Journal of Multivariate Analysis, 2003)

00/86

D. BUYENS, A. DE VOS, The added value of the HR-department : empirical study and development of an integrated framework, June 2000, 37 p. (published as ‘Personnel and human resource managers: Power, prestige and potential - Perceptions of the value of the HR function’, in Human Resource Management Journal, 2001).

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K. CAMPO, E. GIJSBRECHTS, P. NISOL, The impact of stock-outs on whether, how much and what to buy, June 2000, 50 p.

00/88

K. CAMPO, E. GIJSBRECHTS, P. NISOL, Towards understanding consumer response to stock-outs, June 2000, 40 p. (published in Journal of Retailing, 2000)

00/89

K. DE WULF, G. ODEKERKEN-SCHRÖDER, P. SCHUMACHER, Why it takes two to build succesful buyer-seller relationships July 2000, 31 p. (published as ‘Strengthening Retailer-Consumer Relationships: The Dual Impact of Relationship Marketing Tactics and Consumer Personality’, in Journal of Business Research, 2002)

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J. CROMBEZ, R. VANDER VENNET, Exact factor pricing in a European framework, September 2000, 38 p.

00/91

J. CAMERLYNCK, H. OOGHE, Pre-acquisition profile of privately held companies involved in takeovers : an empirical study, October 2000, 34 p.

00/92

K. DENECKER, S. VAN ASSCHE, J. CROMBEZ, R. VANDER VENNET, I. LEMAHIEU, Value-at-risk prediction using context modeling, November 2000, 24 p. (published in European Physical Journal B, 2001)

00/93

P. VAN KENHOVE, I. VERMEIR, S. VERNIERS, An empirical investigation of the relationships between ethical beliefs, ethical ideology, political preference and need for closure of Dutch-speaking consumers in Belgium, November 2000, 37 p. (published in Journal of Business Ethics, 2001)

00/94

P. VAN KENHOVE, K. WIJNEN, K. DE WULF, The influence of topic involvement on mail survey response behavior, November 2000, 40 p. (published in Psychology & Marketing, 2002).

00/95

A. BOSMANS, P. VAN KENHOVE, P. VLERICK, H. HENDRICKX, The effect of mood on self-referencing in a persuasion context, November 2000, 26p. (published in Advances in Consumer Research, vol.28, 2001, p.115-121)

00/96

P. EVERAERT, G. BOËR, W. BRUGGEMAN, The Impact of Target Costing on Cost, Quality and Development Time of New Products: Conflicting Evidence from Lab Experiments, December 2000, 47 p.

00/97

G. EVERAERT, Balanced growth and public capital: An empirical analysis with I(2)-trends in capital stock data, December 2000, 29 p. (forthcoming in Economic Modelling, 2003).

00/98

G. EVERAERT, F. HEYLEN, Public capital and labour market performance in Belgium, December 2000, 45 p. (forthcoming in Journal of Policy Modeling, 2004)

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01/100 A. DE VOS, D. BUYENS, Managing the psychological contract of graduate recruits: a challenge for human resource management, January 2001, 35 p. 01/101 J. CHRISTIAENS, Financial Accounting Reform in Flemish Universities: An Empirical Study of the implementation, February 2001, 22 p. 01/102 S. VIAENE, B. BAESENS, D. VAN DEN POEL, G. DEDENE, J. VANTHIENEN, Wrapped Input Selection using Multilayer Perceptrons for Repeat-Purchase Modeling in Direct Marketing, June 2001, 23 p. (published in International Journal of Intelligent Systems in Accounting, Finance & Management, 2001). 01/103 J. ANNAERT, J. VAN DEN BROECK, R. VANDER VENNET, Determinants of Mutual Fund Performance: A Bayesian Stochastic Frontier Approach, June 2001, 31 p. (forthcoming in European Journal of Operational Research, 2003) 01/104 S. VIAENE, B. BAESENS, T. VAN GESTEL, J.A.K. SUYKENS, D. VAN DEN POEL, J. VANTHIENEN, B. DE MOOR, G. DEDENE, Knowledge Discovery in a Direct Marketing Case using Least Square Support Vector Machines, June 2001, 27 p. (published in International Journal of Intelligent Systems, 2001). 01/105 S. VIAENE, B. BAESENS, D. VAN DEN POEL, J. VANTHIENEN, G. DEDENE, Bayesian Neural Network Learning for Repeat Purchase Modelling in Direct Marketing, June 2001, 33 p. (published in European Journal of Operational Research, 2002). 01/106 H.P. HUIZINGA, J.H.M. NELISSEN, R. VANDER VENNET, Efficiency Effects of Bank Mergers and Acquisitions in Europe, June 2001, 33 p. 01/107 H. OOGHE, J. CAMERLYNCK, S. BALCAEN, The Ooghe-Joos-De Vos Failure Prediction Models: a CrossIndustry Validation, July 2001, 42 p. 01/108 D. BUYENS, K. DE WITTE, G. MARTENS, Building a Conceptual Framework on the Exploratory Job Search, July 2001, 31 p. 01/109 J. BOUCKAERT, Recente inzichten in de industriële economie op de ontwikkelingen in de telecommunicatie, augustus 2001, 26 p. (published in Economisch en Sociaal Tijdschrift, 2001). 01/110 A. VEREECKE, R. VAN DIERDONCK, The Strategic Role of the Plant: Testing Ferdows' Model, August 2001, 31 p. (published in International Journal of Operations and Production Management, 2002) 01/111 S. MANIGART, C. BEUSELINCK, Supply of Venture Capital by European Governments, August 2001, 20 p. 01/112 S. MANIGART, K. BAEYENS, W. VAN HYFTE, The survival of venture capital backed companies, September 2001, 32 p. (published in Venture Capital, 2002) 01/113 J. CHRISTIAENS, C. VANHEE, Innovations in Governmental Accounting Systems: the Concept of a "Mega General Ledger" in Belgian Provinces, September 2001, 20 p. (published in V. Montesinos and J.M. Vela, Innovations in governmental accounting, Kluwer Academic Publishers, 2002). 01/114 M. GEUENS, P. DE PELSMACKER, Validity and reliability of scores on the reduced Emotional Intensity Scale, September 2001, 25 p. (published in Educational and Psychological Measurement, 2001) 01/115 B. CLARYSSE, N. MORAY, A process study of entrepreneurial team formation: the case of a research based spin off, October 2001, 29 p. 01/116 F. HEYLEN, L. DOBBELAERE, A. SCHOLLAERT, Inflation, human capital and long-run growth. An empirical analysis, October 2001, 17 p. 01/117 S. DOBBELAERE, Insider power and wage determination in Bulgaria. An econometric investigation, October 2001, 30 p. (forthcoming in International Journal of Manpower, 2003) 01/118 L. POZZI, The coefficient of relative risk aversion: a Monte Carlo study investigating small sample estimator problems, October 2001, 21 p. (forthcoming in Economic Modelling, 2003).

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01/119 N. GOBBIN, B. VAN AARLE, Fiscal Adjustments and Their Effects during the Transition to the EMU, October 2001, 28 p. (published in Public Choice, 2001). 01/120 A. DE VOS, D. BUYENS, R. SCHALK, Antecedents of the Psychological Contract: The Impact of Work Values and Exchange Orientation on Organizational Newcomers’ Psychological Contracts, November 2001, 41 p. 01/121 A. VAN LANDSCHOOT, Sovereign Credit Spreads and the Composition of the Government Budget, November 2001, 29 p. 01/122 K. SCHOORS, The fate of Russia’s former state banks: Chronicle of a restructuring postponed and a crisis foretold, November 2001, 54 p. (published in Europe-Asia Studies, 2003) 01/123 J. ALBRECHT, D. FRANÇOIS, K. SCHOORS, A Shapley Decomposition of Carbon Emissions without Residuals, December 2001, 21 p. (published in Energy Policy, 2002). 01/124 T. DE LANGHE, H. OOGHE, Are Acquisitions Worthwhile? An Empirical Study of the Post-Acquisition Performance of Privately Held Belgian Companies Involved in Take-overs, December 2001, 29 p. 01/125 L. POZZI, Government debt, imperfect information and fiscal policy effects on private consumption. Evidence for 2 high debt countries, December 2001, 34 p. 02/126 G. RAYP, W. MEEUSEN, Social Protection Competition in the EMU, January 2002, 20 p. 02/127 S. DE MAN, P. GEMMEL, P. VLERICK, P. VAN RIJK, R. DIERCKX, Patients’ and personnel’s perceptions of service quality and patient satisfaction in nuclear medicine, January 2002, 21 p. 02/128 T. VERBEKE, M. DE CLERCQ, Environmental Quality and Economic Growth, January 2002, 48 p. 02/129 T. VERBEKE, M. DE CLERCQ, Environmental policy, policy uncertainty and relocation decisions, January 2002, 33 p. 02/130 W. BRUGGEMAN, V. DECOENE, An Empirical Study of the Influence of Balanced Scorecard-Based Variable Remuneration on the Performance Motivation of Operating Managers, January 2002, 19 p. 02/131 B. CLARYSSE, N. MORAY, A. HEIRMAN, Transferring Technology by Spinning off Ventures: Towards an empirically based understanding of the spin off process, January 2002, 32 p. 02/132 H. OOGHE, S. BALCAEN, Are Failure Prediction Models Transferable From One Country to Another? An Empirical Study Using Belgian Financial Statements, February 2002, 42 p. 02/133 M. VANHOUCKE, E. DEMEULEMEESTER, W. HERROELEN, Discrete Time/Cost Trade-offs in Project scheduling with Time-Switch Constraints? February 2002, 23 p. (published in Journal of the Operational Research Society, 2002) 02/134 C. MAYER, K. SCHOORS, Y. YAFEH, Sources of Funds and Investment Activities of Venture Capital Funds: Evidence from Germany, Israel, Japan and the UK?, February 2002, 31 p. 02/135 K. DEWETTINCK, D. BUYENS, Employment implications of downsizing strategies and reorientation practices: an empirical exploration, February 2002, 22 p. 02/136 M. DELOOF, M. DE MAESENEIRE, K. INGHELBRECHT, The Valuation of IPOs by Investment Banks and the Stock Market: Empirical Evidence, February 2002, 24 p. 02/137 P. EVERAERT, W. BRUGGEMAN, Cost Targets and Time Pressure during New Product Development, March 2002, 21 p. (published in International Journal of Operations and Production Management, 2002). 02/138 D. O’NEILL, O. SWEETMAN, D. VAN DE GAER, The impact of cognitive skills on the distribution of the blackwhite wage gap, March 2002, 14 p. 02/139

W. DE MAESENEIRE, S. MANIGART, Initial returns: underpricing or overvaluation? Evidence from Easdaq and EuroNM, March 2002, 36 p.

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02/140 K. SCHOORS, Should the Central and Eastern European accession countries adopt the EURO before or after accession? March 2002, 29p. (published in Economics of Planning, 2002). 02/141 D. VERHAEST, E. OMEY, Overeducation in the Flemish Youth Labour Market, March 2002, 39p. 02/142 L. CUYVERS, M. DUMONT, G. RAYP, K. STEVENS, Wage and Employment Effects in the EU of International Trade with the Emerging Economies, April 2002, 24 p. (forthcoming in Weltwirtschaftliches Archiv, 2003). 02/143 M. GEUENS, P. DE PELSMACKER, The Role of Humor in the Persuasion of Individuals Varying in Need for Cognition, April 2002, 19 p. (published in Advances in Consumer Research, 2002). 02/144 M. VANHOUCKE, E. DEMEULEMEESTER, W. HERROELEN, Net Present Value Maximization of Projects with Progress Payments, April 2002, 23 p. (published in European Journal of Operational Research, 2003) 02/145 E. SCHOKKAERT, D. VAN DE GAER, F. VANDENBROUCKE, Responsibility-sensitive egalitarianism and optimal linear income taxation, April 2002, 37p. (revised version, co-authored by R. Luttens, forthcoming in Mathematical Social Sciences, 2004). 02/146 J. ANNAERT, J. CROMBEZ, B. SPINEL, F. VAN HOLLE, Value and size effect: Now you see it, now you don’t, May 2002, 31 p. 02/147 N. HOUTHOOFD, A. HEENE, The quest for strategic groups: Overview, and suggestions for future research, July 2002, 22 p. 02/148 G. PEERSMAN, The transmission of monetary policy in the Euro area: Are the effects different across countries?, July 2002, 35 p. 02/149 G. PEERSMAN, F. SMETS, The industry effects of monetary policy in the Euro area, July 2002, 30 p. 02/150 J. BOUCKAERT, G. DHAENE, Inter-Ethnic Trust and Reciprocity: Results of an Experiment with Small Business Entrepreneurs, July 2002, 27 p. (forthcoming in European Journal of Political Economy, 2004) 02/151 S. GARRÉ, I. DE BEELDE, Y. LEVANT, The impact of accounting differences between France and Belgium, August 2002, 28 p. (published in French in Comptabilité - Controle - Audit, 2002) 02/152 R. VANDER VENNET, Cross-border mergers in European banking and bank efficiency, September 2002, 42 p. 02/153 K. SCHOORS, Financial regulation in Central Europe: the role of reserve requirements and capital rules, September 2002, 22 p. 02/154 B. BAESENS, G. VERSTRAETEN, D. VAN DEN POEL, M. EGMONT-PETERSEN, P. VAN KENHOVE, J. VANTHIENEN, Bayesian Network Classifiers for Identifying the Slope of the Customer Lifecycle of Long-Life Customers, October 2002, 27 p. (forthcoming in European Journal of Operational Research, 2003). 02/155 L. POZZI, F. HEYLEN, M. DOSSCHE, Government debt and the excess sensitivity of private consumption to current income: an empirical analysis for OECD countries, October 2002, 19 p. 02/156 D. O’NEILL, O. SWEETMAN, D. VAN DE GAER, Consequences of Specification Error for Distributional Analysis With an Application to Intergenerational Mobility, November 2002, 35 p. 02/157 K. SCHOORS, B. VAN DER TOL, Foreign direct investment spillovers within and between sectors: Evidence from Hungarian data, November 2002, 29 p. 02/158 L. CUYVERS, M. DUMONT, G. RAYP, K. STEVENS, Home Employment Effects of EU Firms' Activities in Central and Eastern European Countries, November 2002, 25 p. 02/159 M. VANHOUCKE, Optimal due date assignment in project scheduling, December 2002, 18 p.

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02/160 J. ANNAERT, M.J.K. DE CEUSTER, W. VANHYFTE, The Value of Asset Allocation Advice. Evidence from the Economist’s Quarterly Portfolio Poll, December 2002, 35p. (revised version forthcoming in Journal of Banking and Finance, 2004) 02/161 M. GEUENS, P. DE PELSMACKER, Developing a Short Affect Intensity Scale, December 2002, 20 p. (published in Psychological Reports, 2002). 02/162 P. DE PELSMACKER, M. GEUENS, P. ANCKAERT, Media context and advertising effectiveness: The role of context appreciation and context-ad similarity, December 2002, 23 p. (published in Journal of Advertising, 2002). 03/163 M. GEUENS, D. VANTOMME, G. GOESSAERT, B. WEIJTERS, Assessing the impact of offline URL advertising, January 2003, 20 p. 03/164 D. VAN DEN POEL, B. LARIVIÈRE, Customer Attrition Analysis For Financial Services Using Proportional Hazard Models, January 2003, 39 p. (forthcoming in European Journal of Operational Research, 2003) 03/165 P. DE PELSMACKER, L. DRIESEN, G. RAYP, Are fair trade labels good business ? Ethics and coffee buying intentions, January 2003, 20 p. 03/166 D. VANDAELE, P. GEMMEL, Service Level Agreements – Een literatuuroverzicht, (forthcoming in Tijdschrift voor Economie en Management, 2003).

Januari 2003, 31 p.

03/167 P. VAN KENHOVE, K. DE WULF AND S. STEENHAUT, The relationship between consumers’ unethical behavior and customer loyalty in a retail environment, February 2003, 27 p. 03/168

P. VAN KENHOVE, K. DE WULF, D. VAN DEN POEL, Does attitudinal commitment to stores always lead to behavioural loyalty? The moderating effect of age, February 2003, 20 p.

03/169 E. VERHOFSTADT, E. OMEY, The impact of education on job satisfaction in the first job, March 2003, 16 p. 03/170 S. DOBBELAERE, Ownership, Firm Size and Rent Sharing in a Transition Country, March 2003, 26 p. (forthcoming in Labour Economics, 2004) 03/171 S. DOBBELAERE, Joint Estimation of Price-Cost Margins and Union Bargaining Power for Belgian Manufacturing, March 2003, 29 p. 03/172 M. DUMONT, G. RAYP, P. WILLEMÉ, O. THAS, Correcting Standard Errors in Two-Stage Estimation Procedures with Generated Regressands, April 2003, 12 p. 03/173 L. POZZI, Imperfect information and the excess sensitivity of private consumption to government expenditures, April 2003, 25 p. 03/174 F. HEYLEN, A. SCHOLLAERT, G. EVERAERT, L. POZZI, Inflation and human capital formation: theory and panel data evidence, April 2003, 24 p. 03/175 N.A. DENTCHEV, A. HEENE, Reputation management: Sending the right signal to the right stakeholder, April 2003, 26 p. 03/176 A. WILLEM, M. BUELENS, Making competencies cross business unit boundaries: the interplay between inter-unit coordination, trust and knowledge transferability, April 2003, 37 p. 03/177 K. SCHOORS, K. SONIN, Passive creditors, May 2003, 33 p. 03/178 W. BUCKINX, D. VAN DEN POEL, Customer Base Analysis: Partial Defection of Behaviorally-Loyal Clients in a Non-Contractual FMCG Retail Setting, May 2003, 26 p. 03/179 H. OOGHE, T. DE LANGHE, J. CAMERLYNCK, Profile of multiple versus single acquirers and their targets : a research note, June 2003, 15 p.

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WORKING PAPER SERIES

10

03/180 M. NEYT, J. ALBRECHT, B. CLARYSSE, V. COCQUYT, The Cost-Effectiveness of Herceptin® in a Standard Cost Model for Breast-Cancer Treatment in a Belgian University Hospital, June 2003, 20 p. 03/181 M. VANHOUCKE, New computational results for the discrete time/cost trade-off problem with time-switch constraints, June 2003, 24 p. 03/182 C. SCHLUTER, D. VAN DE GAER, Mobility as distributional difference, June 2003, 22 p. 03/183 B. MERLEVEDE, Reform Reversals and Output Growth in Transition Economies, June 2003, 35 p. 03/184 G. POELS, Functional Size Measurement of Multi-Layer Object-Oriented Conceptual Models, June 2003, 13 p. (forthcoming in Lecture Notes in Computer Science, 2003) 03/185 A. VEREECKE, M. STEVENS, E. PANDELAERE, D. DESCHOOLMEESTER, A classification of programmes and its managerial impact, June 2003, 11 p. (forthcoming in International Journal of Operations and Production Management, 2003) 03/186 S. STEENHAUT, P. VANKENHOVE, Consumers’ Reactions to “Receiving Too Much Change at the Checkout”, July 2003, 28 p. 03/187 H. OOGHE, N. WAEYAERT, Oorzaken van faling en falingspaden: Literatuuroverzicht en conceptueel verklaringsmodel, July 2003, 35 p. 03/188 S. SCHILLER, I. DE BEELDE, Disclosure of improvement activities related to tangible assets, August 2003, 21 p. 03/189 L. BAELE, Volatility Spillover Effects in European Equity Markets, August 2003, 73 p. 03/190 A. SCHOLLAERT, D. VAN DE GAER, Trust, Primary Commodity Dependence and Segregation, August 2003, 18 p 03/191 D. VAN DEN POEL, Predicting Mail-Order Repeat Buying: Which Variables Matter?, August 2003, 25 p. 03/192 T. VERBEKE, M. DE CLERCQ, The income-environment relationship: Does a logit model offer an alternative empirical strategy?, September 2003, 32 p. 03/193 S. HERMANNS, H. OOGHE, E. VAN LAERE, C. VAN WYMEERSCH, Het type controleverslag: resultaten van een empirisch onderzoek in België, September 2003, 18 p. 03/194 A. DE VOS, D. BUYENS, R. SCHALK, Psychological Contract Development during Organizational Socialization: Adaptation to Reality and the Role of Reciprocity, September 2003, 42 p. 03/195 W. BUCKINX, D. VAN DEN POEL, Predicting Online Purchasing Behavior, September 2003, 43 p. 03/196 N.A. DENTCHEV, A. HEENE, Toward stakeholder responsibility and stakeholder motivation: Systemic and holistic perspectives on corporate sustainability, September 2003, 37 p. 03/197 D. HEYMAN, M. DELOOF, H. OOGHE, The Debt-Maturity Structure of Small Firms in a Creditor-Oriented Environment, September 2003, 22 p. 03/198 A. HEIRMAN, B. CLARYSSE, V. VAN DEN HAUTE, How and Why Do Firms Differ at Start-Up? A ResourceBased Configurational Perspective, September 2003, 43 p. 03/199 M. GENERO, G. POELS, M. PIATTINI, Defining and Validating Metrics for Assessing the Maintainability of EntityRelationship Diagrams, October 2003, 61 p. 03/200 V. DECOENE, W. BRUGGEMAN, Strategic alignment of manufacturing processes in a Balanced Scorecard-based compensation plan: a theory illustration case, October 2003, 22 p.