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Industrial Concentration and Bank Performance in an Emerging Market: Evidence from Croatia

This paper assesses the impact of industrial concentration on performance of Croatian banks. The dynamic panel model is applied to an unbalanced data sample of 46 banks over the period from 2002 to 2010, while controlling for bank-specific, external financial and macroeconomic determinants of bank performance. The estimation results indicate that concentration in the banking system has significant positive effects on bank profitability. This evidence supports the Structure-Conduct-Performance approach according to which industry structure (usually presented by concentration) influences banks’ conduct which in turn determines banks’ performance. Beside industrial concentration, statistically significant impact on bank profitability is confirmed for bank-specific determinants - bank size, bank age, credit risk, bank intermediation, as well as for external factors that encompass interest rate spread, stock market return, economic growth and monetary instability.

Industrial concentration; banks; profitability; emerging market

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