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East Europe banking catching up with West Europe

By on 25 November 2016

The financial crisis also has its positive side. When zooming in on productivity, banks in East Europe caught up with the West European banking market. They also strengthened their partnerships with their western counterparts. Researchers published these findings in the Journal of Banking & Finance this month.

The Maastricht Treaty in 1992 established the Economic and Monetary Union (EMU) and embodied the start of the integration process of European banking markets. Since then, new and old EU member states integrate their national financial markets with those of other member states. Aim is removing trade restrictions, so service providers can enter EU markets quickly and establish fruitful partnerships.

The introduction of the euro was part of the pursuit of free trade. But also equating national legislation to create a juridical level playing field for all financial players in the EU. Banks and other service providers must be able to compete freely on price, products and quality altogether.

East and West Europe Convergence

The EU measures convergence – the EU term for the integration of the markets of member states – at monetary level. This includes the extent to which transactions between banks in various member states are realized. Another example is the degree to which financial companies from different member states offer the same variety of portfolio.

In their report the scientists demonstrate how the interaction of 539 commercial banks in all 28 EU member states developed during crisis years 2008-2012. In parallel, they examined the extent to which banks developed their productivity.

Crisis did hurt

The researchers analyzed the productivity of 539 EU banks by evaluating their efficiency, technological developments and economies of scale. The results left no doubt both the debt and the euro crisis undermined productivity of the EU banks. Banks experienced considerable reduction of their average productivity growth, although there are fluctuations over the years. Especially technological developments within banks stagnated during the crisis period, the researchers conclude.

At the same time EU market entrants such as Bulgaria, Croatia, Romania, Lithuania and Hungary managed to increase their productivity during 2010 to 2012. The productivity increase was driven by efficiency improvement. Reducing regulation in their home markets is supposed to have boosted this efficiency.

Emerging East Europe

The scientists argue that where West European banks lost a part of their competitive edge, banks from East Europe were able to catch up with their counterparts. Ultimately that reinforced convergence, the desired market integration by the EU between member states.

“Our findings suggest that convergence among European banks is mainly driven by the loss of competitiveness of the Western banking system and catch-up process of some Eastern banks, especially during the sovereign debt crisis period.”

Call for more convergence

At the end of their report, the researchers note that for full convergence the EU member states still have to settle many legal barriers. National budgets and economic policies should no longer be assessed by each EU member state itself but by all EU member states for each country.

Equally so, they emphasize the importance of achieving an EU Deposit Guarantee Scheme. Although deposit guarantee schemes in each EU member state currently cover €100,000 (£85,000) per depositor per bank, a system for the entire European Union would equalize the deposit guarantee system in the EU to the smallest details.

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Bas van Essen
Frankfurt

Savingsmonitor is a news blog reporting about savings behavior and statistics across whole the European Union. Bas van Essen is responsible for the content. Bas is a former business reporter, who covered the Dutch startup scene, the job market and personal finance. Bas served the Dutch Financial Times ('Financieele Dagblad'), the Dutch 'Financiële Telegraaf', Sprout.nl, Intermediair.nl and IDG. He followed a Master Communication Science and MBA Big Data & Business Analytics at the University of Amsterdam.