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This paper estimates the efficiency of the Czech commercial banks in the period 2001–2010 using the non-parametric Data Envelopment Analysis. We simultaneously use two alternative specifications – CCR model and BCR model – that differ in returns to scale assumption. Differences in estimated efficiency scores of individual banks are quite large up to 70 percentage points. Largest banks perform significantly worse than mid-size and small banks. This efficiency gap decreases if variable returns to scale are considered in the estimation. The average efficiency in the banking sector remained nearly unchanged during the analysed period. Although each year is estimated separately one can observe a deterioration of average efficiency during the recent crisis period.

This paper estimates the market power in the Czech banking sector during the period 2000 2010. In order to measure the degree of market power in the Czech banking sector, the authors used the Lerner index, the Herfindahl-Hirschman index and the concentration ratio. The Lerner index is applied to data from 15 banks, which covers about 90% of the Czech banking market. The paper describes the theoretical framework of the competition, especially the Lerner index and measures of concentration. Authors also compute separate Lerner index for the Czech credit market and the Czech deposit market. The estimations of the Lerner index do not confirm either monopoly or perfect competition structure in the Czech banking sector over the period analyzed. The competition decreased in the period 2000-2005 which was affected by the decrease in the price of funds and capital. However, the competition increased in the period 2005-2010, and it was influenced by the increase in the price of funds and capital. From the value obtained from the Lerner index, it was found that the lowest competition was in the deposit market.

The aim of the paper is to estimate the relationship between competition and efficiency in the Czech banking industry in the period 2001–2010. The theoretical definition and literature review of the relationship between banking competition and efficiency is included. Lerner index and Data Envelopment Analysis were used to estimate the degree of competition and efficiency in the Czech banking sector. The market structure of the Czech banking industry was estimated as a monopolistic competition and it was found a slight increase in the competition in the banking sector. The efficiency of the Czech banks increased in the analysed period. Using a Johansen cointegration test, the paper contributes to the empirical literature, testing not only the causality running from competition to efficiency, but also the reverse effect running from efficiency to competition. The positive relationship between competition and efficiency was estimated in the Czech banking sector. These findings are in line with the Quiet Life Hypothesis and the suggestions that the increase of the competition will contribute to efficiency.