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Market entry, privatization and bank performance in transition


  • Steven Fries
  • Damien Neven
  • Paul Seabright
  • Anita Taci


This paper examines how market entry and privatization have affected the margins and marginal costs of banks in the post-communist transition. We estimate bank revenue and cost functions, allowing the estimated parameters to change over time. In the first sub-period (1995-98), we find that privatized banks earned higher margins than other banks, while foreign start-ups had lower marginal costs. In the third sub-period (2002-2004), foreign banks remained low marginal cost service providers, while privatized domestic banks had the widest margins. Subtracting marginal costs from margins to calculate mark-ups, an indication of demand for services, shows that initially privatized banks had the largest mark-ups. However, by the third sub-period, differences among private banks diminished. In comparison to private banks, state banks persistently under-performed in controlling costs and attracting demand. Our evidence therefore indicates that foreign bank entry promoted lower costs and that privatization and market entry encouraged more demand for services. Copyright (c) 2006 The Authors Journal compilation (c) 2006 The European Bank for Reconstruction and Development..

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  • Steven Fries & Damien Neven & Paul Seabright & Anita Taci, 2006. "Market entry, privatization and bank performance in transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(4), pages 579-610, October.
  • Handle: RePEc:bla:etrans:v:14:y:2006:i:4:p:579-610

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    References listed on IDEAS

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    2. Psillaki, Maria & Mamatzakis, Emmanuel, 2017. "What drives bank performance in transitions economies? The impact of reforms and regulations," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 578-594.
    3. Claude Berthomieu & Anastasia Ri, 2009. "Process and Effects of Financial Liberalization in Transition Countries: A Selective Literature Survey," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(4), pages 453-473, December.
    4. Cândida Ferreira, 2009. "European Integration and the Credit Channel Transmission of Monetary Policy," Working Papers Department of Economics 2009/07, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    5. Rossitsa Rangelova Pavlova & Grigor Sariiski, 2015. "Negative Impacts of the Neo-liberal Policies on the Banking Sector in Bulgaria," Contemporary Economics, University of Finance and Management in Warsaw, vol. 9(1), April.
    6. repec:ebl:ecbull:v:4:y:2008:i:14:p:1-5 is not listed on IDEAS
    7. Felix Höffler, 2008. "On the consistent use of linear demand systems if not all varieties are available," Economics Bulletin, AccessEcon, vol. 4(14), pages 1-5.
    8. Mamonov, Mikhail & Vernikov, Andrei, 2015. "Bank ownership and cost efficiency in Russia, revisited," BOFIT Discussion Papers 22/2015, Bank of Finland, Institute for Economies in Transition.
    9. Rainer Haselmann & Paul Wachtel, 2007. "Risk Taking by Banks in the Transition Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 49(3), pages 411-429, September.
    10. Brown, Martin & Maurer, Maria Rueda & Pak, Tamara & Tynaev, Nurlanbek, 2009. "The impact of banking sector reform in a transition economy: Evidence from Kyrgyzstan," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1677-1687, September.
    11. Elena Pelinescu & Petre Caraiani, 2012. "The Credit Policy And Its Impact On The Romanian Economy," New Trends in Modelling and Economic Forecast (MEF 2011), ROMANIAN ACADEMY – INSTITUTE FOR ECONOMIC FORECASTING;"Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences, vol. 1(1), pages 54-68, January.
    12. Felix Höffler, 2008. "On the consistent use of linear demand systems if not all varieties are available," WHU Working Paper Series - Economics Group 08-01, WHU - Otto Beisheim School of Management.
    13. Chen, Chien-Hsun & Mai, Chao-Cheng & Liu, Yu-Lin & Mai, Shin-Ying, 2009. "Privatization and optimal share release in the Chinese banking industry," Economic Modelling, Elsevier, vol. 26(6), pages 1161-1171, November.
    14. Vernikov, Andrei, 2017. "The impact of state-controlled banks on the Russian banking sector," MPRA Paper 77155, University Library of Munich, Germany.

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