MF 34,3 146 Managerial Finance Vol. 34 No. 3, 2008 pp. 146-159 # Emerald Group Publishing Limited 0307-4358 DOI 10.1108/03074350810848036 The determinants of banks’ profits in Greece during the period of EU financial integration Kyriaki Kosmidou Financial Engineering Laboratory, Department of Production Engineering and Management, Technical University of Crete, Chania, Greece Abstract Purpose – This paper aims to examine the determinants of performance of Greek banks during the period of EU financial integration (1990-2002). Design/methodology/approach – The approach is to use an unbalanced pooled time series dataset of 23 banks. Findings – High return on average assets (ROAA) was found to be associated with well-capitalized banks and lower cost to income ratios. Size was positive in all cases but statistically significant only when the macroeconomic and financial structure variables entered the models. Turning to macroeconomics and financial structure, the growth of gross domestic product (GDP) has a significant and positive impact on ROAA, while inflation has a significant negative impact. Originality/value – The paper’s value lies in showing that money supply growth has no significant impact on profits, whereas the ratios banks’ assets to GDP, stock market capitalization to banks assets and concentration are all statistical significant and negatively related to ROAA. Keywords Greece, Banking, Performance criteria, European Union Paper type Research paper Introduction Over the last years, a number of significant changes occurred in the Greek banking system as a result of its adaptation to new conditions such as the deregulation of national markets, the establishment of the single EU market and the internationalization of competition. The major changes in the Greek banking system were realized after 1992, when the Greek Parliament passed the Second Banking Directive concerning establishment, operation and supervision of credit institutions. Moreover, over the last years, the major Greek banks have enhanced their business abroad, mainly in the Balkans, and have strengthened their position in the domestic market through mergers, acquisitions and strategic alliances. The result was a substantial restructuring of the banking sector and a new equilibrium in the Greek financial market. The wave of mergers and acquisitions had an effect on the concentration in the Greek banking market which remains high, although lower than in five other EU Member states (Netherlands, Belgium, Sweden, Finland and Denmark). As it concerns the type and ownership of banks, commercial banks are the ones that dominate the Greek banking system. The most significant change relative to ownership has been the withdrawal of the state from commercial banking in recent years, which reduced the number of directly or indirectly state controlled banks from ten in 1995 to three in 2003. It becomes obvious from the above, that a number of changes took place in Greece prior to its entry into the euro zone. In addition, the adoption of the euro by Greece on January 2001 has accelerated other changes not only to monetary conditions, but also to the operational environment as well. The increased competition, along with the The current issue and full text archive of this journal is available at www.emeraldinsight.com/0307-4358.htm