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Bank Performance in Transition Economies

Author

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  • Steven Fries
  • Damien Neven
  • Paul Seabright

    ()

Abstract

This paper examines the performance of 515 banks in 16 transition economies for the years 1994 ??? 99 based on their public financial accounts. We first examine lending behaviour and probability distribution of bank profitability to determine whether these banks exhibit behaviour and performance associated with excessive risk-taking. While we do not find evidence of excessive risk taking on average where there is significant progress in banking and related enterprise reforms, there may be a minority of poorly capitalised banks that do take excessive risks, particularly where progress in reform is less advanced. The paper then estimates cost and revenue functions based on a model of banks as multi-product firms. The results indicate that banks' performance differs significantly depending on the reform environment, as well as the competitive conditions, in which they operate. Banks with high market shares have higher costs and achieve lower margins on their loan and deposit activities. Where there has been significant progress in banking and related enterprise reforms, banks are making comfortable margins on loans and appear to be offering competitive margins on deposits, though they are still achieving overall negative returns on equity. By contrast, when substantial reforms have not been undertaken, banks have been sustaining high negative returns on loans, largely at the expense of depositors; in effect they have been able to appropriate much of the tax that inflation levies on nominal deposits, and have been using this revenue to prop up their weak loan portfolios. Overall interest margins are declining over time but are substantially higher in low reform environments. The results indicate that an appropriate policy and regulatory framework may be a necessary condition for significant progress to be made.

Suggested Citation

  • 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.
  • Handle: RePEc:wdi:papers:2002-505
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    References listed on IDEAS

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    Cited by:

    1. Bonin, John P. & Hasan, Iftekhar & Wachtel, Paul, 2005. "Privatization matters: Bank efficiency in transition countries," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2155-2178, August.
    2. Pistor, Katharina, 2010. "Into the Void: Governing Finance in Central and Eastern Europe," WIDER Working Paper Series 065, World Institute for Development Economic Research (UNU-WIDER).
    3. Bonin, John P. & Hasan, Iftekhar & Wachtel, Paul, 2005. "Bank performance, efficiency and ownership in transition countries," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 31-53, January.
    4. Kenjegalieva, Karligash & Simper, Richard & Weyman-Jones, Tom & Zelenyuk, Valentin, 2009. "Comparative analysis of banking production frameworks in eastern european financial markets," European Journal of Operational Research, Elsevier, vol. 198(1), pages 326-340, October.
    5. Bruinshoofd Allard & Candelon Bertrand & Raabe Katharina, 2005. "Banking Sector Strength and the Transmission of Currency Crises," Research Memorandum 023, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    6. Stefano Cosma & Riccardo Ferretti & Elisabetta Gualandri & Andrea Landi & Valeria Venturelli, 2017. "How Does Financial Market Evaluate Business Models? Evidence From European Banks," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 17105, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    7. Ralph de Haas & Iman van Lelyveld, 2003. "Foreign Banks and Credit Stability in Central and Eastern Europe: friends or foes? A panel data analysis," International Finance 0305001, EconWPA.
    8. Stefania P.S. Rossi & Markus Schwaiger & Gerhard Winkler, 2004. "Banking Efficiency in Central and Eastern Europe," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 8, pages 77-91.
    9. Cândida Ferreira, 2009. "The European Credit Market and Institutions," Working Papers Department of Economics 2009/26, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    10. 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.
    11. Karligash Kenjegalieva & Richard Simper & Thomas Weyman-Jones, 2009. "Efficiency of transition banks: inter-country banking industry trends," Applied Financial Economics, Taylor & Francis Journals, vol. 19(19), pages 1531-1546.
    12. Sándor Gardó, 2010. "Bank Governance and Financial Stability in CESEE: A Review of the Literature," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 6-31.
    13. Gianni De Nicolo & Sami Geadah & Dmitriy L Rozhkov, 2003. "Financial Development in the CIS-7 Countries; Bridging the Great Divide," IMF Working Papers 03/205, International Monetary Fund.
    14. repec:onb:oenbwp:y::i:96:b:1 is not listed on IDEAS
    15. Park, Junghee, 2012. "Corruption, soundness of the banking sector, and economic growth: A cross-country study," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 907-929.
    16. repec:onb:oenbwp:y:2010:i:1:b:1 is not listed on IDEAS
    17. Allard Bruinshoofd & Bertrand Candelon & Katharina Raabe, 2010. "Banking Sector Fragility and the Transmission of Currency Crises," Open Economies Review, Springer, vol. 21(2), pages 263-292, April.
    18. George Emmanuel Iatridis & Anthony Dionysus Persakis, 2012. "Bank profitability determinants under IFRSs," International Journal of Economics and Accounting, Inderscience Enterprises Ltd, vol. 3(1), pages 77-99.
    19. Anca Podpiera & Jiri Podpiera, 2005. "Deteriorating Cost Efficiency in Commercial Banks Signals an Increasing Risk of Failure," Working Papers 2005/06, Czech National Bank, Research Department.
    20. S. Claeys & R. Vander Vennet, 2003. "Determinants of bank interest margins in Central and Eastern Europe. Convergence to the West?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/203, Ghent University, Faculty of Economics and Business Administration.

    More about this item

    Keywords

    banking; cost functions; revenue functions; transition;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L8 - Industrial Organization - - Industry Studies: Services
    • P2 - Economic Systems - - Socialist Systems and Transition Economies

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