Bank of Finland Research Discussion Papers No. 5/2011
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.