Regulations, market power and stability in the banking sector of transition countries.

Abstract

This study explores the channels through which the regulations impact on stability in the banking sector of the transition countries. We argue that the channels through which the different regulations affecting stability vary between EU-member and non-EU transition countries. Our study considers 370 banks from 20 transition countries for the period 2001–2013, where 11 are EU-member (Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia) and 9 are non-EU (Albania, Armenia, Azerbaijan, Belarus, Bosnia, Kazakhstan, Macedonia, Serbia, and Ukraine) states. Our results show that higher economic growth and less competitive conditions would lead to a more stable banking sector in early (EU-member) transition countries. Moreover, the stabilization effect of different regulations suchas capital requirement, activity restrictions and supervisors (mainly Central Banks and other government bodies) is higher to the banks with higher market power. For non-EU transition countries we find that higher inflation rates significantly impact on higher levels of risk taking. However, capital requirements have a stabilization effect and thus its higher level leads to more stable banking sectors in both groups of countries. Overall, our results are consistent with the theory that the outcome of the regulations-reforms varies across countries according to their institutional development and therefore the impact of banking regulation is different between EU-member (early) and non-EU member (late) transition countries.