The Impact of Concentration on Competition and Efficiency in the Lithuanian Banking Sector

Abstract

European banking sectors have been subject to various forms of deregulation, liberalization, as well as dramatic improvements in information technology (IT). As the result of the creation of the European Union’s Single Market, the financial institutions are transforming themselves in response to fundamental changes in regulation and technology. Many of these changes have vast implications for competition, concentration and the efficiency of financial sectors. This paper examines the impact of increasing concentration and new technologies, linked with the mergers and acquisitions process, on the degree of competition and efficiency of the Lithuanian commercial banks. The goal of this paper is to check whether, during the analyzed period (2000-2006), the concentration of the commercial banks had a negative impact on the competition in the Lithuanian banking sector. This study estimates competitive behavior in the Lithuanian banking system by applying the method developed by Panzar and Rosse (1987). The research of concentration in Lithuanian banking sector is based on two most frequently used concentration measures: the Herfindahl-Hirschman index and the k bank concentration ratios, for k = 1, 3 and 5, based on market shares in terms of total assets, loans and deposits of banks. The research of efficiency in Lithuanian banking sector is based on two most frequently used efficiency indicators: ROA and ROE. The panel data for this analysis comprises all Lithuanian commercial banks covered by the National Bank of Lithuanian’s balance sheet as well as profit and loss accounts statistics. These statistics consist of annual data from all banks reporting to the National Bank of Lithuania and cover the period from 2000 to 2006.