Are private banks more efficient than public banks ? Evidence from Russia

We study whether bank ownership is related to bank efficiency in Russia. We find that foreign banks are more efficient than domestic private banks and – surprisingly – that domestic private banks are not more efficient than domestic public banks. These results are not driven by the choice of the production process, the bank’s environment, the management’s risk preferences, the bank’s activity mix, size or the econometric approach. The evidence in fact suggests that domestic public banks are more efficient than domestic private banks and that the efficiency gap between these two types of banks is not lower after the introduction of deposit insurance in 2004. This may be due to increased switching costs or to the moral hazard effects of deposit insurance. The policy conclusion is that the efficiency of the Russian banking system may benefit more from increased levels of competition and higher access of foreign banks than from bank privatization.