Bank Efficiency in Transition Economies: Recent Evidence from South-Eastern Europe

Abstract

This study examines the cost and profit efficiency of banking sectors in six transition countries of SouthEastern Europe over the period 1998-2008. Using the stochastic frontier approach, our analysis reveals that the average cost efficiency of SEE banks is 68.59% and the average profit efficiency is 53.87%. The second-stage regressions on the determinants of bank efficiency further show that foreign banks are associated with higher profit efficiency but moderately lower cost efficiency. Government banks are associated with lower profit efficiency. The efficiency gap between foreign banks, domestic private banks and government banks, however, has narrowed over time. We also find that the degree of individual banks' competitiveness has a positive association with both cost and profit efficiency. Finally, institutional development, proxied by progress in banking reforms, privatization and corporate governance restructuring, also has a positive impact on bank efficiency.

The determinants of bank efficiency in Central Asia

“…But is it important to note that these are the best data available even though they may be incomplete. Surprisingly, the results here show that the financial crisis in 2007-2008 had a positive impact on profit efficiency for the banks in Central Asia, which is inconsistent with the existing literature (Fang et al, 2011). 7 However, given the Central Asian States are not integrated into the international financial system this is probably picking up some unobserved factor.…”

“…The coefficient on the interaction between state ownership and the time trend is positive, indicating that the state owned banks started to catch up with domestic private owned banks and are more profitable in recent years. This supports the results by Fang et al (2011) and, perhaps, the restructuring, modernisation and competition policies of the banking system in the Central Asia over the last two decades have substantially improved the governance of the institutions. Surprisingly, the lagged value of economic growth has a negative impact on profit efficiency.…”

“…However, a cost function is rarely possible for transition economies as data on prices are poor and where they exist there is little variation across the sector. More recently Fang et al (2011) examined the cost and profit efficiency of the banking sector in six countries of South-Eastern Europe for the period 1998-2008. Using a stochastic frontier approach the result show average cost efficiency of 68.59% and the average profit efficiency of 53.87%.…”

Banking Efficiency in the Enlarged European Union: Financial Crisis and Convergence

“…We found that cost efficiency (Figure ) trended down 2000–2003, increased through 2008 and has fallen again in the years since; for profit efficiency (Figure ), we observe a negative trend since 2007, reaching minimum levels in 2009 and 2013. These results are evidence for the positive effect of European integration on cost efficiency, which has been reported in previous studies (Kosak et al ; Fang et al ; Gallizo et al ,). This positive effect is explained by the reforms that these countries implemented, which supported a more solid institutional framework that protects the legal rights of banks and increased competition after accession to the EU, including via the entry of foreign banks.…”

Efficiency and Competition in the Ghanaian Banking Industry: A Panel Granger Causality Approach

“…This result raises questions about policies that are directed to promote bank competition with the objective of reducing the price of financial services and products (Fang et al, 2011).…”