Financial analysis of EU member and candidate countries' banking systems in the integration process: An evaluation from convergence point of view

Historically, financial banking has had a major impact in the development of Europeaneconomy. While there is a tendency to finance from capital markets in the EU, financingfrom segmented banking market is also very important; especially for SMEs which havea big share in the EU economy, as well as small-size customers. The constitution of anintegrated banking market for the EU seems to be a priority for the success of a singlecurrency and financial market integration. This study investigates whether the EUmember and candidate countries? banking systems, (for which harmonization with thesame regulations under the same market and competitive conditions is aimed), arebecoming similar in their financial states. To achieve the study objective we employcluster analysis and convergence to mean of EU-15 with euclidian distance during theintegration process. Factor analysis was also applied, to summarize the variables beforethe cluster analysis conducted. The research covered the 1996-2002 period. The bankingsystems in EU-15 countries, as well as in the new member countries that were candidatesduring the sample period and Bulgaria, Romania and Turkey were included in the sample.Results of the analysis showed that in EU the financial states of the banking systems ofEU-15 countries are more similar and this similarity increased in 1999 (the launch of thesingle currency) but has not been maintained. It was observed that the financial states ofthe banking systems of Cyprus and Malta were very similar to the EU-15. It is found thatCEEC?s banking sectors except Litvania, Latvia and Slovenia are not financiallyconverged to EU-15 banking system. The financial state of the Turkish banking systemwas also found to be similar to the new member countries, except for the crisis year 2001.Key Words: EU Banking Integration, Factor Analaysis, Cluster Analaysis, Convergence