This study examines the impact of political factors on the behaviour and performance of commercial banks in 11 Central European countries from 1995 to 2008. Using a unique dataset of commercial banks and political factors, we find that state-owned banks report significantly smaller net interest income ratios during the years of parliamentary elections. The proxy cumulative amount of net interest income lost by state-owned banks during the election years equals, on average, 0.38% of each country's GDP. The decrease in the profitability of state-owned banks is caused primarily by the lower interest rates charged on loans. In contrast, we document that the lending growth of state-owned banks is not affected by the political cycle. Hence, to a certain extent, this study supports the view that state-owned banks constitute a tool that serves political goals in Central European countries.

The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in a worse financial condition than their subsidiaries. This situation created a unique opportunity to study new aspects of market discipline exercised by non-financial depositors. Using a comprehensive data set, we find that the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. We establish that depositors’ actions were more strongly influenced by negative press rumors concerning parent companies than by fundamentals. The impact of rumors was especially perceptible when rumors turned out ex post to be founded. Additionally, we document that public aid announcements were primarily interpreted by depositors as confirmation of a parent company’s financial distress. Our results indicate that depositors react rationally to sources of information other than financial statements; this discovery has policy implications, as depositor discipline is usually the only viable and universal source of market discipline for banks in emerging economies.