Banking Sector Competition in the Panzar-Rosse Framework and Net Interest Margins: An Empirical Analysis Using the General Method of Moments

Abstract

This paper provides empirical evidence on the determinants of net interest margins in Central, Eastern, and Southeastern European countries (CESEE) during the period 1999–2009, with a particular focus on the relationship between banking sector competition and net interest margins. Using country-level Panzar-Rosse H-statistic estimates as a measure of competition, and the General Method of Moments, it has been determined that banking sector competition had a negative impact on net interest margins. In order to check for consistency, alternative measures of competition, such as the Lerner index and the Herfindahl-Hirschman index, have also been used. The results appear consistent and suggest that higher market power is associated with higher interest margins. A number of interactions have been used to check for the impact of competition when interacted with other variables. The study also provides evidence on the impact of other bank-specific, macroeconomic, and institutional variables on net interest margins.