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Managerial Behavior and Cost/Profit Efficiency in the Banking Sectors of Central and Eastern European Countries

This paper analyzes cost and profit efficiency level and the managerial behavior of banks in nine Central and Eastern European countries (the Czech Republic, Estonia, Hungary, Latvia, Lithuania Poland, Romania, Slovakia and Slovenia), providing cross-country and time series evidence on the period 1995-2002. A stochastic frontier analysis based on a Fourier flexible form indicates a generally low level of cost efficiency and an even lower level of profit efficiency. However, we also find significant differences among countries and some evidence of an increasing tendency over time in profit efficiency and, to an even stronger extent, in cost efficiency. Cost and profit efficiency scores are negatively correlated both on a country wide as well as on a bank by bank basis. Furthermore, instead of just looking at the determinants of cost and profit efficiency (e.g. asset quality, problem loans and risk), we test several hypotheses of managerial behavior using the Granger causality approach based on the intertemporal relation between bank efficiency, capitalization and problem loans, as proposed by Berger and DeYoung (1997). Even though a static analysis shows a negative correlation between problem loan and efficiency, we find no evidence of bad management hypothesis. Results provide evidence for the bad luck hypothesis suggesting the exogeneity of bad loans triggering inefficiency.

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File URL: http://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Working-Papers/2005/Working-Paper-96/fullversion/wp96_tcm16-27319.pdf
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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 96.

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Length: 47
Date of creation: 04 Mar 2005
Date of revision:
Handle: RePEc:onb:oenbwp:96
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  1. Battese, George E. & Coelli, Tim J., 1988. "Prediction of firm-level technical efficiencies with a generalized frontier production function and panel data," Journal of Econometrics, Elsevier, vol. 38(3), pages 387-399, July.
  2. Altunbas, Yener & Evans, Lynne & Molyneux, Philip, 2001. "Bank Ownership and Efficiency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 926-54, November.
  3. Afriat, Sidney N, 1972. "Efficiency Estimation of Production Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-98, October.
  4. 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.
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