Title Economic and Social Development (Book of Proceedings), 44th International Scientific Conference on Economic and Social Development Editors Mila Nadrljanski, Jasmina Grzinic, Katarzyna Kinga Kowalczyk Scientific Committee / Programski Odbor Marijan Cingula (President), University of Zagreb, Croatia; Sandra Raquel Alves, University of Aveiro, Portugal; Ayuba A. Aminu, University of Maiduguri, Maiduguri, Nigeria; Anona Armstrong, Victoria University, Australia; Gouri Sankar Bandyopadhyay, The University of Burdwan, Rajbati Bardhaman, India; Haimanti Banerji, Indian Institute of Technology, Kharagpur, India; Elisabeth de Jesus Oliveira Brito, University of Aveiro, Portugal; Alla Bobyleva, The Lomonosov Moscow State University, Russia; Leonid K. Bobrov, State University of Economics and Management, Novosibirsk, Russia; Rado Bohinc, University of Ljubljana, Slovenia; Belma Ramic Brkic, University of Sarajevo, Bosnia and Herzegovina; Zeki Atil Bulut, Dokuz Eylul University, Turkey; Adnan Celik, Selcuk University, Konya, Turkey; Angelo Maia Cister, Federal University of Rio de Janeiro, Brasil; Alexey Chernov, RUDN University, Russian Federation; Przemyslaw Chmielecki, Higher Baptist Theological Seminary in Warsaw, Poland; Mirela Cristea, University of Craiova, Romania; Sreten Cuzovic, University of Nis, Serbia; Oguz Demir, Istanbul Commerce University, Turkey; T.S. Devaraja, University of Mysore, India; Onur Dogan, Dokuz Eylul University, Turkey; Darko Dukic, University of Osijek, Croatia; Gordana Dukic, University of Osijek, Croatia; Josko Dvornik, University of Split, Croatia; Alba Dumi, Vlora University, Vlore, Albania; Ksenija Dumicic, University of Zagreb, Croatia; Galina Pavlovna Gagarinskaya, Samara State University, Russia; Fran Galetic, Zagreb University, Croatia; Mirjana Gligoric, Faculty of Economics, Belgrade University, Serbia; Mehmet Emre Gorgulu, Afyon Kocatepe University, Turkey; Aleksandra Grobelna, Gdynia Maritime University, Poland; Liudmila Guzikova, Peter the Great Saint Petersburg Polytechnic University, Russia; Anica Hunjet, University North, Koprivnica, Croatia; Oxana Ivanova, Ulyanovsk State University, Ulyanovsk, Russia; Irena Jankovic, Faculty of Economics, Belgrade University, Serbia; Lara Jelenc, University of Rijeka, Croatia; Myrl Jones, Radford University, USA; Gorazd Justinek, Graduate School of Government and European Studies, Slovenia; Hacer Simay Karaalp, Pamukkale University, Turkey; Grzegorz Karasiewicz, University of Warsaw, Poland; Dafna Kariv, The College of Management Academic Studies, Rishon Le Zion, Israel; Ljilja Kascelan, Univeristy of Montenegro, Montenegro; Salih Katircioglu, Eastern Mediterranean University, Northern Cyprus, Turkey; Hilal Yildirir Keser, Uludag University, Bursa, Turkey; Sophia Khalimova, Institute of Economics and Industrial Engineering of Siberian Branch of Russian Academy of Science, Novosibirsk, Russia; Marina Klacmer Calopa, University of Zagreb, Croatia; Andrej Kovacic, Faculty of Media, Ljubljana, Slovenia; Vladimir Kovsca, University of Zagreb, Croatia; Goran Kozina, University North, Koprivnica, Croatia; Dzenan Kulovic, Univeristy of Zenica, Bosnia and Herzegovina; Robert Lewis, Les Roches Gruyere University of Applied Sciences, Bulle, Switzerland; Ladislav Lukas, Univ. of West Bohemia, Faculty of Economics, Czech Republic; Pascal Marty, University of La Rochelle, France; Vaidotas Matutis, Vilnius University, Lithuania; Marjana Merkac Skok, GEA College of Entrepreneurship, Ljubljana, Slovenija; Daniel Francois Meyer, North West University, South Africa; Gabriela Mezeiova, Slovak Centre of Scientific and Technical Information, Slovak Republic; Marin Milkovic, Rector, University North, Koprivnica, Croatia; Raquel Filipa do Amaral Chambre de Meneses Soares Bastos Moutinho, University of Porto, Portugal; Djordje Nadrljanski, University College of Inspection and Personnel Management in Split, Croatia; Mila Nadrljanski, University College of Inspection and Personnel Management in Split, Croatia; Zlatko Nedelko, University of Maribor, Slovenia; Stevo Nikic, Adriatic University BAR, Serbia; Gratiela Georgiana Noja, West University of Timisoara, Romania; Zsuzsanna Novak, Corvinus University of Budapest, Hungary; Alojzy Z. Nowak, University of Warsaw, Poland; Tomasz Ochinowski, University of Warsaw, Poland; Mislav Ante Omazic, University of Zagreb, Croatia; Barbara Herceg Paksic, University of Osijek, Croatia; Vera Palea, Universita degli Studi di Torino, Italy; Dusko Pavlovic, Libertas International University, Zagreb, Croatia; Igor Pihir, University of Zagreb, Croatia; Dinko Primorac, University North, Koprivnica, Croatia; Zeljka Primorac, University of Split, Croatia; Miroslaw Przygoda, University of Warsaw, Poland; Karlis Purmalis, University of Latvia, Latvia; Nicholas Recker, Metropolitan State University of Denver, USA; Kerry Redican, Virginia Tech, Blacksburg, USA; Humberto Ribeiro, University of Aveiro, Portugal; Robert Rybnicek, University of Graz, Austria; Amelia Cristina Ferreira da Silva, Polytechnic of Porto, Portugal; Vladimir Simovic, University of Applied Sciences Baltazar Zapresic, Croatia; Slavko Simundic, University of Split, Croatia; Tomasz Studzieniecki, Gdynia Maritime University, Poland; Elzbieta Szymanska, Bialystok University of Technology, Poland; Katarzyna Szymanska, The State Higher School of Vocational Education in Ciechanow, Poland; Jan Turyna, University of Warsaw, Poland; Ilaria Tutore, University of Naples Parthenope, Italy; Rebeka Danijela Vlahov, University of Zagreb, Croatia; Bosko Vlahovic, Eduka Publishing, Belgrade, Serbia; Ilko Vrankic, University of Zagreb, Croatia; Stanislaw Walukiewicz, Bialystok University of Technology, Poland; Thomas Will, Agnes Scott College, USA; Li Yongqiang, Victoria University, Australia; Peter Zabielskis, University of Macau, China; Tao Zeng, Wilfrid Laurier University, Waterloo, Canada; Grzegorz Zimon, Rzeszow University of Technology, Poland; Snezana Zivkovic, University of Nis, Serbia. Review Committee / Recenzentski Odbor Marina Klacmer Calopa (President); Ana Aleksic; Sandra Raquel Alves; Ayuba Aminu; Mihovil Andjelinovic; Josip Arneric; Lidija Bagaric; Tomislav Bakovic; Sanja Blazevic; Leonid Bobrov; Ruzica Brecic; Anita Ceh Casni; Iryna Chernysh; Mirela Cristea; Oguz Demir; Jasmina Dvorski; Stjepan Dvorski; Robert Fabac; Ivica Filipovic; Sinisa Franjic; Fran Galetic; Mirjana Gligoric; Tomislav Globan; Anita Goltnik Urnaut; Tomislav Herceg; Irena Jankovic; Emina Jerkovic; Dafna Kariv; Oliver Kesar; Hilal Yildirir Keser; Tatjana Kovac; Vladimir Kovsca; Angelo Maia Cister; Katarina Marosevic; Vaidotas Matutis; Marjana Merkac Skok; Josip Mikulic; Ljubica Milanovic Glavan; Daniel Francois Meyer; Natanya Meyer; Guenter Mueller; Ivana Nacinovic Braje; Zlatko Nedelko; Gratiela Georgiana Noja; Zsuzsanna Novak; Alka Obadic; Claudia Ogrean; Igor Pihir; Najla Podrug; Vojko Potocan; Dinko Primorac; Zeljka Primorac; Sanda Renko; Humberto Ribeiro; Vlasta Roska; Souhaila Said; Armando Javier Sanchez Diaz; Tomislav Sekur; Lorena Skuflic; Mirko Smoljic; Petar Soric; Mario Spremic; Joanna Stawska; Matjaz Stor; Tomasz Studzieniecki; Lejla Tijanic; Daniel Tomic; Boris Tusek; Rebeka Daniela Vlahov; Ilko Vrankic; Thomas Will; Zoran Wittine; Tao Zeng; Grzegorz Zimon; Snezana Zivkovic; Berislav Zmuk. Organizing Committee / Organizacijski Odbor Domagoj Cingula (President); Ivan Brkovic; Marina Klacmer Calopa; Spomenko Kesina; Erlino Koscak; Mila Nadrljanski; Veronika Nemetschek; Miroslaw Przygoda; Michael Stefulj; Kristina Vidovic; Rebeka Danijela Vlahov; Sime Vucetic; Nikola Vukcevic. Publishing Editor Domagoj Cingula Publisher Design Print Varazdin Development and Entrepreneurship Agency, Varazdin, Croatia / University College of Inspection and Personnel Management in Split, Split, Croatia / The University of Applied Sciences Baltazar, Zapresic, Croatia / University North, Koprivnica, Croatia / Faculty of Management University of Warsaw, Warsaw, Poland / Faculty of Law, Economics and Social Sciences Sale - Mohammed V University in Rabat, Morocco Printing 100 CD ISSN 1849-6903 The Book is open access and double-blind peer reviewed. Our past Books are indexed and abstracted by ProQuest, EconBIZ, CPCI (Web of Science) and EconLit databases and available for download in a PDF format from the Economic and Social Development Conference website: http://www.esd-conference.com © 2019 Varazdin Development and Entrepreneurship Agency, Varazdin, Croatia; University College of Inspection and Personnel Management in Split, Split, Croatia; The University of Applied Sciences Baltazar, Zapresic, Croatia; University North, Koprivnica, Croatia; Faculty of Management University of Warsaw, Warsaw, Poland; Faculty of Law, Economics and Social Sciences Sale - Mohammed V University in Rabat, Morocco. All rights reserved. Authors are responsible for the linguistic and technical accuracy of their contributions. Authors keep their copyrights for further publishing. CONTENTS BENEFITS OF EDUCATIONAL DATA MINING ............................................................. 1 Alisa Bilal Zoric STRATEGIES FOR IMPROVING SOCIO-ECONOMIC DEVELOPMENT BASED ON KNOWLEDGE IN POST-CONFLICT AREAS OF COLOMBIA: THE CASE OF BIOREFINERIES IN MONTES DE MARIA (MARIA MOUNTAINS) ........................... 8 Carlos Ariel Cardona, Carlos Eduardo Orrego, Carlos Daniel Acosta, Juan Camilo Solarte, Sara Piedrahita, Johnny Poveda, Natalia Salgado, Steven Delgado CONDUCTING PSC INSPECTION ON CROATIAN VESSELS ................................... 17 Luka Grbic, Mate Baric, Karlo Cimera, Dragan Curin CONFLICT OF JURISDICTION AND CONFLICT OF LAWS IN THE ELECTRONIC COMMERCE CONTRACTS ............................................................................................... 22 Maher Aljaber EDUCATION AND ENTREPRENEURSHIP CAREER CHOICE IN KOSOVO ......... 26 Saranda Lajqi, Justina Shiroka-Pula, Besnik A. Krasniqi CUSTOMER PREFERENCES IN PASSENGER RAILWAY TRANSPORT ............... 35 Grazyna Rosa, Izabela Ostrowska, Agnieszka Tomaszewicz CHALLENGES AND PERSPECTIVES OF SOCIAL ECONOMY IN SLOVAKIA .... 43 Eva Pongracz DEVELOPMENT OF WAGES IN THE SLOVAK REPUBLIC NATIONAL AND REGIONAL VIEW ................................................................................................................ 50 Eva Rievajova, Roman Klimko COURT SYSTEM AS ONE OF THE MAIN ECONOMIC ISSUES ............................... 63 Farouq Al-Shibli SPECIAL EVIDENTIARY ACTIONS IN THE CONTEXT OF JUDICIAL CONTROL OF THEIR APPLICATION IN PRACTICE IN THE REPUBLIC OF CROATIA ....... 69 Nevena Aljinovic ECONOMIC DIMENSION OF CHILDCARE IN POLAND IN 2017-2018 ................... 81 Agata Gomolka GLOBALIZATION AND CLIMATE CHANGE - ARE STATE INTERVENTIONS A SOLUTION? ........................................................................................................................... 91 Hana Polackova INCREASE OF RESIDENTIAL REAL ESTATE PRICES AS A THREAT OF SYSTEMIC RISK ACCUMULATION IN CROATIA NEW CHALLENGES FOR MONETARY POLICY MAKERS ..................................................................................... 100 Suzana Herman, Petra Popek Biskupec TOURISM PRODUCT OF K D FUTURE DEVELOPMENT GUIDELINES ....................................................................................................................... 108 Ivona Haluzan Bistrovic, Irena Bosnic THE IMPORTANCE OF MARKET POWER IN BANKING: THE CASE STUDY OF THE CZECH REPUBLIC ................................................................................................... 116 Jan Cernohorsky, Lucie Kricenska ZERO MARGINAL COST IN MAGAZINE INDUSTRY: CHANGING OF COST PARADIGM IN TRY ........................................................ 125 Josko Lozic DETERMINANTS OF BANK PROFITABILITY: EVIDENCE FROM THE CZECH BANKS .................................................................................................................................. 137 Libena Cernohorska, Pavla Kotatkova Stranska, Karolina Broklova THE DYNAMICS OF MUNICIPALITY CONSOLIDATION - COMPARATIVE ANALYSIS OF SUCCESS AND FAILURE CASES........................................................ 147 Marian Kachniarz THE RATE OF RETURN ON PUBLIC INVESTMENTS INTO ENTREPRENEURSHIP DEVELOPMENT SUPPORT PROGRAMS ..................................................................... 155 Ranko Markus, Mirela Omerovic THE ECONOMIC IMPACT OF THE GROWTH OF HEALTH EXPENDITURE ON HOUSEHOLDS IN SLOVAKIA ........................................................................................ 165 Michaela Novakova EXPLAINING CHINESE FDI IN CEE COUNTRIES - A FIXED EFFECTS PANEL DATA ANALYSIS ............................................................................................................... 173 Popovici Oana Cristina INFORMATION RELATED TO HUMAN RIGHTS IN FINANCIAL REPORTING THE CASE OF POLAND ................................................................................................... 182 Ewelina Papaj-Wlislocka THE APPLICATION OF THE THREE LINES OF DEFENSE CONCEPT IN RISK MANAGEMENT AND FRAUD RISK ON THE EXAMPLE SELECTED LISTED COMPANIES ....................................................................................................................... 190 Agnieszka Skoczylas-Tworek DETERMINING THE EFFECTS OF SECTORAL LABOUR PRODUCTIVITY USING DIVISIA DECOMPOSITION METHOD ON ECONOMIC GROWTH OF SELECTED ASEAN ECONOMIES ........................................................................................................ 203 Ricardo L. Dizon FINANCIAL ASPECTS OF DIVORCE PROCEEDING CASE LAW FINDINGS .. 216 Natasa Lucic, Katarina Marosevic MARKETING OF STEM IN CROATIA BY USING NEW TECHNOLOGIES .......... 225 Ante Roncevic, Kristina Androlic, Nina Druzinic THE NEEDS AND CAPABILITIES OF A QUALITY PRIVATE INITIATIVE IN HIGHER EDUCATION ...................................................................................................... 240 Djordje Nadrljanski, Mila Nadrljanski, Veronika Nemetschek ANALYSIS OF CREDIT RATING IMPACT - CASE STUDY OF THE CZECH REPUBLIC ........................................................................................................................... 249 Simona Pichova, Jan Zila ECONOMY AND GLOBALIZATION ............................................................................. 257 Sladjana Zivanovic, Sanja Smolovic MODEL OF ANALYSIS OF DEMAND FOR AIR TRANSPORT IN THE ADRIATIC AIRPORTS ........................................................................................................................... 265 Teo Bratincevic, Eva Mijatovic, Toni Miljak THE INTERNATIONAL COMPETITIVENESS OF FORMER EAEC COUNTRIES: WHAT WOULD BE THEIR INTERNATIONAL TRADE? .......................................... 272 Tomislav Galovic, Petar Misevic, Igor Arapovic THE MUSIC INDUSTRY IN THE CONTEXT OF DIGITIZATION ........................... 279 Miroslav Skoro, Ante Roncevic THE ROLE AND REPRESENTATION OF EXPERT SYSTEMS IN MAKING DECISIONS ON GRANTING CREDIT IN BANKS IN THE REPUBLIC OF CROATIA ................................................................................................................................................ 289 Luksa Lulic, Branka Stipanovic, Hrvoje Smoljic TAX INCIDENCE OF THE IMPLEMENTATION OF THE PHILIPPINE TAX REFORM FOR ACCELERATION AND INCLUSION (TRAIN) ACT: A COMPUTABLE GENERAL EQUILIBRIUM-MICROSIMULATION APPROACH 304 Ricardo L. Dizon THE RECONSTRUCTION OF AGE LIMITATION TO MARRY AFTER THE CONSTITUTIONAL COURT MARK DECISION ............. 321 Moh Fadhil ADULTERY ARTICLES IN THE CRIMINAL CODE BILL: FORMS OF ACCOMMODATION FOR THE DEVELOPMENT OF NATIONAL LAW AGAINST ISLAMIC VALUES ............................................................................................................. 332 Any Ismayawati PUBLISHING ACTIVITIES OF SHIITES AND DEMOCRATIZATION OF ISLAMIC THOUGHT IN INDONESIA .............................................................................................. 339 Idzam Fautanu, Taufiq Rahman SHARIA AND DEMOCRACY: EFFORTS TO SYNERGIZE THE DEMANDS OF FAITH WITH THE LEGAL SYSTEM IN INDONESIA ................................................ 347 Nurrohman Syarif REACTUALIZATION OF (MASLAHAH) THE COMMON GOOD AS A BASIS OF CONTEMPORARY ISLAMIC LAW ISTINBATH - A COUNTER SCRIPTURALISM PARADIGM ON INTERPRETATION OF RELIGIOUS TEXTS IN THE ERA OF SUSTAINABLE DEVELOPMENT GOALS .................................................................... 360 Muhammad Usman, Joko Roby Prasetiyo LITERATURE REVIEW ON MEDIATION/SULH IN RESOLVING CHILD CUSTODY DISPUTES IN THE SYARIAH COURT IN MALAYSIA .......................... 371 Nora Abdul Hak, Ahmad Mukhlis Bin Mansor, Roslina Che Soh Libena Cernohorska University of Pardubice Studentská 84, Pardubice 532 10, Czech Republic libena.cernohorska@upce.cz Pavla Kotatkova Stranska Czech Technical University in Prague pavla.kotatkova.stranska@cvut.cz Karolina Broklova University of Pardubice Studentská 84, Pardubice 532 10, Czech Republic Karolina.Broklova@student.upce.cz ABSTRACT This paper is focused to construct model to examine the influence of selected determinants of profitability in the Czech banking sector. The goal of composing the simultaneous equation model is to verify and roughly quantify the assumed relationship between profitability in the Czech banking sector and selected determinants (variables) in period 2004 2017, i.e., 481 observations. As a part of the model that was designed, we verified the hypothesis that profitability in the Czech banking sector depends on selected determinants at a 0.05 level of significance. We tested the given data with the goal of verifying the proposed hypotheses on whether profitability (ROA, ROE) in the Czech banking sector is influenced by capital adequacy, balance sheet, taxation rate, the central bank's interest rates and GDP per capita. For verifying the hypotheses, we created a 2 equation model with nine variables.The model is estimation for two stochastically variable. The composed simultaneous equation confirmed influence was also confirmed only for certain determinant. The research question verifies the assumption that the ROE ratio is positively influenced by the inflation rate and the central tion assesses the mutual ties between ROA ratio and capital adequacy, taxation rate and gross domestic product per capita. The research question verifies the assumption that the ROA ratio is negatively influenced by the taxation rate and GDP per capital. The ROA has the heterogeneous relationship with capital adequacy. All the Czech banks analysed were achieved statistically significant influence of taxation rate on ROA. Using the proposed simultaneous equation model, it is possible to verify and roughly quantify the assumed relationship between the Czech banking sector's profitability and selected determinants. Keywords: Czech bank, identifiability, profitability, simultaneous equations 1. INTRODUCTION The reasoning behind using a system of simultaneous equations is that it has been used in a similar way in scientific studies by Greene (2003), Chow (1960), Aggarwal, Jacques (2001), and Easton et al. (2002), for example. They used simultaneous equations to construct macroeconomic models, primarily in the areas of employment, national ownership, production, and modeling time series. The goal of this paper is to compose a model that examines the influence of selected determinants of profitability in the Czech banking sector during the years 2004 2017 by using a simultaneous equation model with a structural form and while preserving the economic interpretation and limitations of the model's individual parameter. Empirical studies dealing with banking sector profitability often express profitability as only one equation containing banking, macroeconomic and regulatory ratio. Analysis of the banking sector's profitability is focused only on constructing basic regression models (scientific studies by Maudos, de Guevera, 2004; Bourke, 1989; Huizinga, 2000; Molyneux , Thornton, 1992; etc.); at the same time, the data set comprises data for individual banks and the size of the sampling frame amounted to hundreds of values. A closer look at the individual determinants influencing the banking sector's profitability determines that it is possible to define mutually independent and analytically dependent equation. This means that profitability should be described using a system of simultaneous and mutually dependent equation. This paper begins with the assumption that profitability in the Czech banking sector will be dependent on capital adequacy, balance sheet total, taxation rate, inflation rate, the Czech National Bank's interest rates and gross domestic product per capita. A two equation model will be created with nine variables. Data for the established period will be entered into the simultaneous equation model, and analysis will be conducted separately for the individually selected bank On account of data availability Raiffeisenbank, UniCredit Bank, Citibank, J&T Banka, LBBW and Sberbank. Bank selection further evolved due to the banking sector's heterogeneity concerning the size of the balance sheet total. 2. LITERATURE REVIEW CHAPTER Short (1979) and Bourke (1989) published as first studies which attempted to identify some of the major determinants of bank profitability. There is a large literature dealing with determinants that influence the profitability of banks. The literature divides the determinants of bank profitability into internal and external factors to the bank. Studies on the determinants of bank profitability have typically focused on the returns on bank assets (ROA) and return on equity (ROE). More recent studies have expanded the number of determinants considered. Many studies (e.g. Bikker, Hu, 2002; Abreu, Mendes, 2002; Molyneux, Thornton, 1992; Bourke, 1989; Dietrich, Wanzenried, 2014; Djalilov, Piesse, 2016; Short, 1979; Revell, 1979; Bolt et al. 2012; Petria et al., 2015; Lui, Wilson, 2010) have examined the effect of bank profitability on bank-specific characteristics (i.e. capital ratio, operational efficiency, bank size, ownership and concentration) and macroeconomic characteristics (i.e. inflation and GDP). The empirical studies have focused their analyses either on cross-country evidence or on the banking system of individual countries. The studies by Molyneux, Thornton (1992), Demirgüç, Kunt, Huizinga (1999), Abreu, Mendes (2002); Bourke (1989), Djalilov, Piesse (2016) or Petria et al. (2015) investigate a panel data set. Some of these studies investigated bank profitability determinants for European banks (Abreu, Mendes, 2002; Molyneux, Thornton, 1992; Maudos, de Guevara, 2004; Djalilov, Piesse, 2016). Studies by Dietrich and Wanzenried (2011), Athanasoglou et al. (2008), Horváth (2009); Berger (1995) or Lui and Wilson (2010) focus their analyses on single countries. A number of authors have focused profitability analysis on research on the combination of internal and external determinants of bank profitability, such 1979), inflation (Revell, 1979), gross domestic product (Bikker, Hu, 2002) etc. Bank size has been traditionally measured according to balance sheet total. The CNB's method also comes out of this assumption; it divides banks into three groups according to balance sheet total: large, medium and small. Bank size and profitability closely relate to a bank's capital adequacy (Short 1979). Large banks tend to rise cheaper, i.e., foreign capital, and therefore appear to be more Teplý (2011). The selection of bank profitability determinants is based on the mentioned above studies and data availability. We classify as dependent variables ROA and ROE. We choose as independent variables capital adequacy, balance sheet total, taxation rate, the central bank's interest rates, inflation rate and GDP per capita. 3. METHODOLOGY The first pioneer of the theory of simultaneous equations was Haavelmo in 1943 (Haavelmo, 1943). Other significant statisticians in this area were Anderson, Rubin and Hurwicz, who primarily dealt with studying the estimate of structural parameter. The first steps in the direction of expanding econometric theory were recorded in the 1960's in the work of Basmann (1957), Bergstrom (1962) and Kabe (1963, 1964). In these, the densities of score functions were deduced for the two stage method of least squares and the ordinary least squares method (LSM) in simple simultaneous equation model. MSR may be explanatory variables and endogenous variable. Differentiation shall be still "predetermined" variable the explanatory variables uncorrelated on error term into individual equation. Linear SEM (SEM interdependent type) its structural form are obtainable as (1) where Y = (ytj) is n × q the matrix endogenous variables, ) is q × q regular the matrix structural endogenous parameters, X=(xtk) is n × p the matrix predetermination variables, B=( kj) is p × q the matrix structural predetermination parameters, E=( tj) is n × q the matrix error term structural form, and . of structural equations (1) to reach the reduced form (2) (2) Where The term (2) is expressed as an unlimited reduced form. This form of simultaneous equation can be compatibly estimated by the classic LSM. Due to this, it is necessary to check the so called identifiability of the structural equation for the reason that different sets of structural SEM parameters can correspond with the same set of statistical data. This fact results in the compatibility of one of the model's reduced form equations with various mutually dependent structural equations that are not possible to differentiate from each other, because they contain the same variables, i.e., the same statistical form. Identification is conducted separately for each equation. The model is identified if all its equations are identified. The condition for identifiability in simultaneous equations corresponds to condition (4): (4) where k** The following order identified is: If the model is not identified, it is not identified with economic theory. More detail on SEM can be found, for example, in Haavelmo (1943) and Basmann (1957). 4. DATA AND MODEL SPECIFICATION The data was acquired from the Bankscope database. Because of data availability and the development of the Czech banking sector, only nine banks were selected. These banks were the ones for which it was possible to acquire the selected ratios for the entire period of 2004 2017. We tested the given data with the goal of verifying the proposed hypotheses on whether profitability in the Czech banking sector is influenced by capital adequacy, balance sheet, taxation rate, the central bank's interest rates and GDP per capita. For verifying the hypotheses, we created a 2 equation model with nine variables. The selection of variables entering the analysis is based mostly on the works Maudos - de Guevera (2004), Bourke (1989), Huizinga (2000), Molyneux and Thornton (1992). Prior research result describing their interrelations that researchers have not considered functions to be jointly determined and use for example instrument panel regression. This article provides an integrated analysis of the interrelations among ROA - ROE and balance sheet total - capital adequacy - taxation rate - GDP per capital - inflation rate - the central bank´s interest rates. It follows from this argument that panel regression cannot be used, but it used simultaneous equations. The simultaneous equations use in the analyses. The simultaneous equations used for analyses, for example, Spitzer (1977), Tuwaijri (2004) and Jacques (1997). Frequently in economic practice, we are not able to adequately determine endogenous variables with one equation, because the behavior of microeconomic and macroeconomic values is able to be satisfactorily explained only by using a set of mutually dependent relationships. This is seen when the endogenous variable and its observation are determined not only by predetermined variables but also by other endogenous variables. 4.1. Estimation Models of Simultaneous Equations The model is estimation for three stochastically variable. It includes endogenous variables: y1t, y2t and predetermination variables: x1t, x2t, x3t, x4t, x5t, x6t and x7t. We use as endogenous variables: y1t ROE, y2t ROA and predetermination variables x1 unit vector, x2 balance sheet total, x3 capital adequacy, x4 taxation rate, x5 Gross domestic product per capita (GDP per capita), x6 inflation rate, x7 the central bank's interest rates. The random effects (or error terms) are for j = 1, 2, 3. The forms models: Identification of the above equations for the models of simultaneous equations: k** = 3, g variables in the model, is 7. 5. RESULTS OF THE ESTIMATION OF THE SIMULTANEOUS EQUATIONS FOR THE MODEL OF SELECTED BANKS' PROFITABILITY The goal of composing the simultaneous equation model is to verify and roughly quantify the assumed relationship between profitability in the Czech banking sector and capital adequacy, balance sheet total, taxation rate, inflation rate, the Czech National Bank's interest rates and gross domestic product per capita in period 2004 2017, i.e., 481 observations. Only 486 data items go into the actual analysis. Data reduction is caused by treatment of the data in order to meet the basic conditions for simultaneous equations. The reason for data reduction was that all input variables verified for assumption of non-stacionarity. All variables showed non- stacionarity (it was verified by Dickey-Fuller test). The variables transferred to the assumption stacionarity using first-difference model. The model of simultaneous equations verified in terms of residual analysis, determination index, and statistical significance of regression parameters. We used Breusch-Pagan test for testing normality of residual. The null hypothesis was not rejected. The residues fulfill the condition of homoscedasticity (p-values were 0.1112 - 0.2135). The index of determination value fluctuated around an average of 65 70%, which points to a higher definite level of correlation. For all equations with an unconfirmed statistical significance, the value of the index of determination remains in single digit percentage. The dependence with respect to the values for The second equation assesses the mutual ties between the ROA ratio and capital adequacy, tax rate, and gross domestic product per capita. The two stage least squares method was used to resolve the simultaneous econometric model with the two equations that was proposed above. Processing took place using SW GRETL. The model's first equation expresses the dependence of the ROE ratio on the value of the ROA ratio, balance sheet total, inflation rate and the Czech National Bank's interest rate. The second equation assesses the mutual ties between the ROA ratio and capital adequacy, taxation rate and gross domestic product per capita. (See Table 1) Table following on the next page Table 1: Parameters of individual simultaneous equations for selected the Czech Bank´s - without absolute term (own calculation) Bank L ar ge b an k s CS 1. equation 13.75410 0.45896 0.45987 2. equation 0.011256 CSOB 1. equation 11.6878 0.25891 0.6362 2. equation 0.0032569 -3.59787 KB 1. equation 7.66515 -0.000000289 0.002099 1.25697 2. equation 0.0011096 -3.56987 UniCredit 1. equation 11.256 0.616737 0.35645 2. equation 0.20237 M id d le b an ks J&T Banka 1. equation 4.1256 -0.000002101 0.129302 0.554877 2. equation 0.15771 Raiffaisen 1. equation 12.7689 4.37149 0.1598 1.58975 2. equation 0.0473318 -0.78798 0.0002569 Sberbank 1. equation 7.5689 2.69887 0.13415 0.265405 2. equation 0.03689 -0.2569 -0.00001897 S m al l b an k LBBW* 1. equation 1.0526 0.69875 2.71623 2. equation 0.02569 -0.08975 0.0002156 B ra n ch es of fo re ig n b an k s Citibank 1. equation 15.5876 0.01258 1.8779 2. equation 0.25648 -0.02569 -0.025698 Note: *LBBW Bank CZ a. bank exist from 17. 9. 2008. Until the bank was called BAWAG Bank CZ a. (in Czech banking market). Since 1.9. 2008 100% shareholder is the third largest bank Landesbank Baden Württemberg (LBBW). The parameters in bold type in above were indicated as statistically significant in terms of testing statistical significance at a level of 0.05. Statistical significance was not confirmed for the other parameters; this is most likely caused by the length of the time series or an inappropriately selected function type, i.e., the selected linear function was not the most appropriate. The equations with statistical significance demonstrated for most parameters showed the value of the index of determination fluctuating at an average of 65 70%, which points to a higher definite level of correlation. For the equations with unconfirmed statistical significance, the index of determination's value remains in single digit percentage. 5.1. Economic Interpretation of the Proposed Model's First Equation We have verified the first research question using the model that was composed i.e., that there is statistically significant relationship between the ROE ratio and the group of independent variables not only with the expression of a quantified relationship but also with the verification of statistical significance. The research question verifies the assumption that the ROE ratio is Next the ROE has positive relationship with the ROA ratio. The ROE has the heterogeneous relationship with the balance sheet total ratio (Table 2). LBBW took a conservative approach to maintaining a strong capital base and liquid position in 2010. The bank was forced to make certain difficult decisions concerning managing the loan portfolio mainly in the sector of corporate banking. This resulted in increasing provision. This accounting measure had significant impact on the bank's profitability and lead to them showing net loss. Table 2: Summary of economic interpretation of the results of regression parameter model´s first equation - for dependent variable ROE (own calculation) ROA Balance sheet total Inflation rate The central bank's interest rates CS SV/positive SV/negative SN/positive SV/positive CSOB SV/positive SV/negative SN/positive SV/positive KB SV/positive SV/positive SN/positive SV/positive UniCredit SV/positive SV/negative SN/positive SV/positive J&T Banka SV/positive SV/negative SN/positive SV/positive Raiffaisen SV/positive SV/positive SN/positive SV/positive Sberbank SV/positive SV/positive SN/positive SV/positive LBBW SV/positive SV/negative SN/positive SV/positive Citibank SV/positive SV/negative SN/positive SV/positive A statistically significant positive influence of balance sheet total on ROE, the same as shown by Smirlock (1985), was confirmed for Raiffeisenbank. J&T Bank achieved the same positive influence, but statistically significant. For CS, a statistically significant negative influence of balance sheet total on the ROE ratio was confirmed. The same influence was achieved for UniCredit. Furthermore, a positive influence was confirmed for inflation rate when a growing value for inflation level supports the growth of the ROE ratio's value. Bourke (1989) and Molyneux - Thornton (1992), for example, came to the same conclusion. There a negative influence only for KB, i.e., a situation where an increasing inflation rate conversely lowers the ROE ratio value. This conclusion is associated with the conclusions of Revella's study (1989), which warns of the fact that the influence of inflation on bank profitability influences the growth of banks' wages and operating cost. The authors accepted the research question for positive influence for ROA and the central bank´s interest rate so determinants on ROE. 5.2. Economic Interpretation of the Proposed Model's Second Equation We have verified the second research question using the model that was composed i.e., that there is statistically significant relationship between the the ROA and the group of independent variables (capital adequacy, taxation rate and GDP per capita) not only with the expression of a quantified relationship but also with the verification of statistical significance. The research question verifies the assumption that the ROA ratio is negatively influenced (i.e., an inverse relationship) by the taxation rate and GDP per capital. The ROA has the heterogeneous relationship with capital adequacy. All the Czech banks analyzed were achieved statistically significant influence of taxation rate on ROA (Table 3). Table following on the next page Table 3: Summary of economic interpretation of the results of regression parameter model´s second equation - for dependent variable ROA (own calculation) Capital adequacy Taxation rate GDP per capital CS SN/negative SV/negative SV/negative CSOB SN/negative SV/negative SV/negative KB SN/negative SV/negative SV/negative UniCredit SN/negative SV/negative SV/negative J&T Banka SV/positive SV/negative SV/negative Raiffaisen SN/positive SV/ negative SN/negative Sberbank SN/positive SV/ negative SN/negative LBBW SN/negative SV/negative SN/negative Citibank SN/negative SV/ negative SN/negative There was an interesting result for CS; here, a statistically significant negative relationship was confirmed where an increasing taxation rate lowered the ROA ratio. This fact corresponds with the results of the study by Demirgüç Kunt - Huizinga (1999). The authors accepted the research question for negative influence for taxation rate and GDP per capital so determinants on ROA. 6. CONCLUSIONS Using the simultaneous equation model, a model was created that explores the influence of selected determinants on bank profitability in the Czech Republic. The simultaneous equation model was composed of two equations. Using the proposed simultaneous equation model, it is possible to verify and roughly quantify the assumed relationship between the Czech banking sector's profitability and capital adequacy, balance sheet total, taxation rate, inflation rate, Czech National Bank interest rates and gross domestic product per capita. Nine banks operating from 2004 2014 in the Czech banking sector were included in the model. The research question verifies the assumption that the ROE ratio is positively influenced by the inflation rate and the ROE has the heterogeneous relationship with the balance sheet total ratio. The authors accepted the research question for positive influence for ROA and the central bank´s interest rate so determinants on ROE. These findings are consistent with economic theory and the conclusions of Smirlock (1995) and Short (1979). The second equation assesses the mutual ties between ROA ratio and capital adequacy, taxation rate and gross domestic product per capita. The research question verifies the assumption that the ROA ratio is negatively influenced (i.e., an inverse relationship) by the taxation rate and GDP per capital. The ROA has the heterogeneous relationship with capital adequacy. All the Czech banks analysed were achieved statistically significant influence of taxation rate on ROA. We can find different impacts between taxation rate and ROA e.g. in conclusions of the authors Demirgüç Kunt - Huizinga (1999). There are many ways to use the estimated econometric model. Primarily, it is possible to apply it at the macro level when quantifying and testing economic hypotheses that have been derived from economic theory. The constructed model can be used by banks when predicting their profitability with respect to a change in preset macroeconomic variables. In the proposed model, this means central bank interest rates, GDP, the tax rate, and the rate of inflation. Thanks to the model, which is constructed using three component equations, it is possible to identify the basic determinants of bank profitability and to subsequently influence this profitability using an appropriately chosen tool (i.e., via a monetary authority or agent of fiscal policy). Employing a time delay, it is possible to observe how the influence of individual bank profitability determinants increases or decreases with respect to the state of the internal and external environments. ACKNOWLEDGEMENT: The paper has been created with the financial support of The Czech Science Foundation (project GACR No. 17-02509S Emerging financial risks during a global low interest rate environment) and University of Pardubice (project SGS_2019_018 - LITERATURE: 1. Abreu, M., Mendes, V. (2002). Commercial Bank Interest Margins and Profitability: Evidence for Some EU Countries. In CISEP, no. 830. 2. Aggarwal, R., Jacques, K. T. (2001). The impact of FDICIA and prompt corrective action on bank capital and risk: Estimates using a simultaneous equations model. In Journal of Banking and Finance (p. 1139 1160). 3. Athanasoglou, P., Brissimis, S., Delis, M. (2008). Bank-specific, industry-specificand macroeconomic determinants of bank profitability. In Journal of International Financial Markets, Institutions and Money (p. 121 136). 4. Basmann, R. L. (1957). A Generalized classical method of linear estimation of coefficients in a structural equation. In Econometrica, (p. 77 83). 5. Bergstrom, A. R. (1988). The History of Continuous Time Econometric Model. In Econometric Theory (p. 365 388). 6. Bankscope (2018). World banking information source. Bureau Van Dijk CD-ROM. 7. Berger, A. (1995). The profit structure relationship in banking: Tests of market-power and efficient-structure hypotheses. In Journal of Money, Credit and Banking (p. 404 431). 8. BikkeR, J. A., Hu, H. (2002), Cyclical Patterns in Profits. Provisioning and Lending of Bank. In DNB Staff Reports, 86, no. 1. 9. Bolt, W., De Han, L., Hoeberichts, M., Van Oordt, M. R., Swank, J. (2012). Bank profitability during recessions. In Journal of Banking & Finance (p. 2552-2564). 10. Bourke, P. (1989). Concentration and other determinants of bank profitability in Europe, North America and Australia. In Journal of Banking and Finance (p. 65 79). 11. CZSO (2016): Key macroeconomic indicators. Retrieved 20.11.2018 from 12. ernohorský, J., Prokop, V. (2016). The Relationship of Concentration and Profitability in Banking Markets. In: 15th International Conference on Finance and Banking in Silesian University. [Conference proceedings] Karviná: OPF v Karviné (p. 40 49). 13. ernohorský obotníková, P., Teplý, P. (2011). The Challenges of Basel III for the Czech Banking Sector. In: 13t h International Conference Finance and Banking the Czech Republic in Silesian University. [Conference proceedings] Karviná: OPF v Karviné , pp. 84 99. 14. Demirgüç Kunt, A., HuizingA, H. (1999). Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence. In World Bank Economic Review (p. 379 408). 15. Dietrich, A., Wanzenried, G. (2011). Determinants of bank profitability before and during the crisis: Evidence from Switzerland. In Journal of International Financial Markets, Institutionsand Money (p. 307 327). 16. Dietrich, A., Wanzenried, G. (2014). The determinants of commercial banking profitability in low-, middle-, and high-income countries. In The Quarterly Review of Economics and Finance (p. 337-354). 17. Djalilov, K., Piesse, J. (2016). Determinants of bank profitability in transition countries: What matters most?. In Research in International Business and Finance (p. 69-82). 18. Easton, P., Taylor, G., Shroff, P., Sougiannis, T. (2002). Using forecasts of earnings to simultaneously estimate growth and the rate of return on equity investment. In Journal of Accounting Research (p. 657 67). 19. Greene, W. (2003). Econometric analysis. New Yersey: Pearson Education. 20. Haavelmo, T. (1943). The statistical implications of a system of simultaneous. In Econometric (p. 1 12). 21. Huizinga, H. (2000). Financial Structure and Bank Profitability. In Policy Research Working Papers. 22. Horváth, R. (2009). The Determinants of the Interest Rate Margins of Czech Banks. In Czech Journal of Economics and Finance (p. 128-136). 23. Chow, G. C. (1960). Tests of equality between sets of coefficients in two linear regressions. In Econometrica, (p. 591-605). 24. Jacques, K., Nigro, P. (1997). Rist-based capital, portfolio risk, and bank capital: A simultaneous equations approach. In Journal of Economics and Business (p. 533-547). 25. Kabe, D.G. (1963). A Note on the Exact Distributions of the GCL Estimators in Two Leading over Identied Case. In Journal of the American Statistical Association (p. 535 537). 26. Kabe, D.G. (1964). On the Exact Distributions of the GCL Estimators in a Leading Three Equation Case. In Journal of the American Statistical Association (p. 881 894). 27. flat demand. In: Proceedings of Hradec economics days 2015 University of Hradec Králové. [Sborník] Hradec Králové: Gaudeamus, pp. 11 16. 28. Lui, H., Wilson, J. (2010). The Profitability of Banks in Japan. In Applied Financial Economics, (p. 1851-1866). 29. Maudos, J., De Guevara, J.F. (2004). Factors explaining the interest margin in the banking sectors of the European Union. In Journal of Banking and Finance (p. 2259 2281). 30. Molyneux, P., Thornton, J. (1992). Determinants of European bank profitability: A note. In Journal of Banking and Finance (p. 1173 1178). 31. from EU 27 banking systems. In Procedia Economics and Finance (p. 518-524). 32. Revell, J. (1979). Inflation and Financial Institution. London: Financial Times. 33. Short, B. K. (1979). The relation between commercial bank profit rates and banking concentration in Canada, Western Europe and Japan. In Journal of Banking and Finance (p. 209 219). 34. Smirlock, M. (1985). Evidence on the (Non) Relationship between Concentration and Profitability in Banking. In Journal of Money, Credit and Banking (). 69 83). 35. Spitzer, J.J. (1977). A simultaneous equations system of money demand and supply using generalized function forms. In Journal of Econometrics (p. 117-128). 36. Tuwaijri, S. A.A., Christensen, T. E., Hughes, K. E. (2004). The relations among environmental disclosure, environmental performance, and economic performance: a simultaneous equations approach. In Acconting, Organizations and Society (p. 447-471). Marian Kachniarz Wroclaw University of Environmental and Life Sciences Wroclaw, Poland marian.kachniarz@upwr.edu.pl ABSTRACT Despite rationale arguments, consolidation reforms are very difficult to implement due to the deep-rooted attachment to the existing borders. Meanwhile, urban functional areas usually extend beyond the city's administrative boundaries, which raises a need of coordinating effective public service provision between the city and its suburbs. A review of world experience shows that two institutional solutions are usually applied here intercommunal cooperation or adaptation of administrative borders to the scope of the functional zone. The objective of the paper is to compare the processes of municipal consolidation in two cities: in Princeton (USA) and Lubin (Poland). Princeton is an example of successful administrative consolidation of the city with the surrounding rural commune, while in Lubin, unfortunately, such a project was not implemented. In the conclusion was found that intercommunal cooperation does not provide sustainable solutions and is exposed to cadenza changes of decision-makers. The most effective seems to be the consolidation of individuals, but its success depends on a very well prepared and transparent procedure. Keywords: urban functional area, administrative consolidation, public services, intercommunal cooperation 1. INTRODUCTION Administrative borders do not usually coincide with the functional impact zone of the cities. Urban functional areas extend beyond the administrative boundaries of the city. This situation has an impact on the organisation of public services. The structure of these services and their quality should be continuous throughout the functional zone. As a result, there is a problem of coordination of effective public service provision between the city and its suburbs. Management in closed administrative boundaries of areas does not correspond to the real needs of the inhabitants and thus interferes with the regularity of the city development process. Therefore, there is a need for solutions that would eliminate these dysfunctions. A review of international experiences shows that two institutional solutions are usually used here - inter-municipal cooperation or the adaptation of administrative borders to the scope of a functional zone. However, the research so far has not provided a clear answer to the question of which method is more effective. The aim of the study is to compare the processes of adaptation of administrative borders to urban functional areas on the example of two cities. One of them is Princeton in New Jersey (USA), which is an example of successful administrative consolidation of the city with the surrounding rural municipality. The second example is the Polish city of Lubin, where inter-communal cooperation was developed and the initiative to consolidate two administrative units has not yet been implemented. The analysis of these two separate cases, although they originate from other continents and countries, should prove the universal regularities that accompany the processes of managing functional zones. Declarative inter- municipal cooperation is able to eliminate many problems and adapt the scope of tasks to the developing functional zones. However, in practice there are few effective and stable examples of such actions. Sub-optimal solutions dominate, and their sustainability is largely based on leaders' personalities rather than institutional solutions. This results in a research hypothesis of this article expressing the conviction that uniform management of the entire functional area