Are Bank Fees in the Czech Republic Excessive?

Abstract

Abstract This paper deals with both theoretical and practical aspects of bank fee and commission income in the European Union with a special emphasis on the Czech Republic. Since fee income represents the largest part of non-interest income earned by banks, it remains a major challenge for bank management to set and maintain an appropriate fee policy. However, solving for the optimal fee structure has not yet been accomplished either on a theoretical level, or in actual practice. In the empirical part of the paper, we analyse banking fee income in EU banking sectors based on three different indicators: the magnitude of net fee and commission income relative to total operating income, to total assets and to gross domestic product. Our results show that the Czech banking sector was not abnormally dependent on fee income compared to other EU countries in the period 2007-2012. As a result, we argue that the high profitability of Czech banks cannot be attributed to abnormal banking fees and commission income, but rather that other factors should be considered. We also concluded that the market concentration of the Czech banking sector declined since the Herfindahl index decreased in last years. The rise in competition was caused mainly by new entrants we refer to as ‘low-cost banks’ that offer a limited product portfolio and provide a large part of their services without fees and commissions. Consequently, we have determined that the business models of some low cost banks in the Czech Republic are not sustainable from a longer term perspective.