Market Structure and Financial Stability of Banks in Central and Eastern European Countries : Does Concentration Matter?

The aim of this paper is to verify the impact of the market structure on financial stability in the banking sectors in Central and Eastern European countries, with particular emphasis on the change in the concentration and the share of foreign capital in the period 1999 – 2015. Using the methodology of panel regression, GMM estimator, we examine the implications of banks’ concentration on bank stability of a group of countries from Central and Eastern Europe. Because many empirical studies have examined the role of market concentration, we complement our results with findings on the market concentration-bank fragility trade-off. Employing a concentration ratios (CR5 and HHI) we find that CEE banks are more fragile within a concentrated environment. Our results also reveal that the persistence of risk is affected by the level of bank concentration and this effect is exacerbated mainly during downturns. Finally, the results of this research did not lead to any definite conclusions as to the role of foreign capital participation and rather indicate the impact of bank size and concentration on bank stability.