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Bank performance, efficiency and ownership in transition countries

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  • Bonin, John P.
  • Hasan, Iftekhar
  • Wachtel, Paul

Abstract

Using data from 1996 to 2000, we investigate the effects of ownership, especially by a strategic foreign owner, on bank efficiency for eleven transition countries in an unbalanced panel consisting of 225 banks and 856 observations. Applying stochastic frontier estimation procedures, we compute profit and cost efficiency scores taking account of both time and country effects directly. In second-stage regressions, we take these efficiency measures along with return on assets as dependent variables with dummy variables for ownership type, a variable controlling for bank size, and dummy variables for year and country effects as explanatory variables. Methodologically, our results demonstrate the importance of including fixed effects, especially country effects, and also suggest a preference for efficiency measures over financial measures of bank performance in empirical work on transition countries. With respect to the impact of ownership, we conclude that privatization by itself is not sufficient to increase bank efficiency as government-owned banks are not appreciably less efficient than domestic private banks. Our results do support the hypothesis that foreign ownership leads to more efficient banks in transition countries. We find that foreign-owned banks are more cost-efficient than other banks and that they also provide better service, in particular if they have a strategic foreign owner. Moreover, the participation of international institutional investors is shown to have a considerable additional positive impact on profit efficiency, which is consistent with the notion that these investors facilitate the transfer of technology and know how to newly privatized banks. In addition, we find that the remaining government-owned banks are less efficient in providing services, which is consistent with the hypothesis that the better banks were privatized first in transition countries. Finally, efficiency declines with bank size, which could call into question government-

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 29 (2005)
Issue (Month): 1 (January)
Pages: 31-53

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Handle: RePEc:eee:jbfina:v:29:y:2005:i:1:p:31-53

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References

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  1. Drakos, Kostas, 2003. "Assessing the success of reform in transition banking 10 years later: an interest margins analysis," Journal of Policy Modeling, Elsevier, vol. 25(3), pages 309-317, April.
  2. Ewa M. Nikiel & Timothy P. Opiela, 2002. "Customer Type And Bank Efficiency In Poland: Implications For Emerging Market Banking," Contemporary Economic Policy, Western Economic Association International, vol. 20(3), pages 255-271, 07.
  3. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Finance and Economics Discussion Series 1997-10, Board of Governors of the Federal Reserve System (U.S.).
  4. David A Grigorian & Vlad Manole, 2006. "Determinants of Commercial Bank Performance in Transition: An Application of Data Envelopment Analysis," Comparative Economic Studies, Palgrave Macmillan, vol. 48(3), pages 497-522, September.
  5. Abarbanell, Jeffery S. & Bonin, John P., 1997. "Bank Privatization in Poland: The Case of Bank Slaski," Journal of Comparative Economics, Elsevier, vol. 25(1), pages 31-61, August.
  6. Hasan, Iftekhar & Marton, Katherin, 2003. "Development and efficiency of the banking sector in a transitional economy: Hungarian experience," Journal of Banking & Finance, Elsevier, vol. 27(12), pages 2249-2271, December.
  7. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 891-911, May.
  8. Igor Jemric & Boris Vujcic, 2002. "Efficiency of Banks in Croatia: A DEA Approach*," Comparative Economic Studies, Palgrave Macmillan, vol. 44(2-3), pages 169-193, September.
  9. Bonin, John P. & Hasan, Iftekhar & Wachtel, Paul, 2004. "Bank performance, efficiency and ownership in transitition countries," BOFIT Discussion Papers 7/2004, Bank of Finland, Institute for Economies in Transition.
  10. Berger, Allen N. & Humphrey, David B. & Pulley, Lawrence B., 1996. "Do consumers pay for one-stop banking? Evidence from an alternative revenue function," Journal of Banking & Finance, Elsevier, vol. 20(9), pages 1601-1621, November.
  11. Steven Fries & Damien Neven & Paul Seabright, 2002. "Bank Performance in Transition Economies," William Davidson Institute Working Papers Series 505, William Davidson Institute at the University of Michigan.
  12. Kraft, Evan & Tirtiroglu, Dogan, 1998. "Bank Efficiency in Croatia: A Stochastic-Frontier Analysis," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 282-300, June.
  13. Fries, Steven & Taci, Anita, 2005. "Cost efficiency of banks in transition: Evidence from 289 banks in 15 post-communist countries," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 55-81, January.
  14. Pulley, Lawrence B & Humphrey, David B, 1993. "The Role of Fixed Costs and Cost Complementarities in Determining Scope Economies and the Cost of Narrow Banking Proposals," The Journal of Business, University of Chicago Press, vol. 66(3), pages 437-62, July.
  15. Steven Fries & Anita Taci, 2002. "Banking reform and development in transition economies," Working Papers 71, European Bank for Reconstruction and Development, Office of the Chief Economist.
  16. Bonin, John P. & Leven, Bozena, 1996. "Polish Bank Consolidation and Foreign Competition: Creating a Market-Oriented Banking Sector," Journal of Comparative Economics, Elsevier, vol. 23(1), pages 52-72, August.
  17. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
  18. David A. Grigorian & Vlad Manole, 2002. "Determinants of Commercial Bank Performance in Transition," IMF Working Papers 02/146, International Monetary Fund.
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