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Bank efficiency in transition economies: recent evidence from South-Eastern Europe

  • Fang, Yiwei


    (Lally School of Management and Technology, New York)

  • Hasan, Iftekhar


    (Lally School of Management and Technology, New York, and Bank of Finland Research)

  • Marton, Katherin


    (Fordham University, New York)

This study examines the cost and profit efficiency of banking sectors in six transition countries of South-Eastern 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.

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Paper provided by Bank of Finland in its series Research Discussion Papers with number 5/2011.

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Length: 43 pages
Date of creation: 14 Mar 2011
Date of revision:
Handle: RePEc:hhs:bofrdp:2011_005
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
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  1. Demirguc-Kunt, Asli & Huizinga, Harry, 1998. "Determinants of commercial bank interest margins and profitability : some international evidence," Policy Research Working Paper Series 1900, The World Bank.
  2. Anca Pruteanu-Podpiera & Laurent Weill & Franziska Schobert, 2008. "Banking Competition and Efficiency: A Micro-Data Analysis on the Czech Banking Industry," Comparative Economic Studies, Palgrave Macmillan, vol. 50(2), pages 253-273, June.
  3. de Haas, Ralph & van Lelyveld, Iman, 2006. "Foreign banks and credit stability in Central and Eastern Europe. A panel data analysis," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1927-1952, July.
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