Bank Performance, Efficiency and Ownership in Transitition Countries

39 Pages Posted: 18 Sep 2007

See all articles by John Bonin

John Bonin

Wesleyan University - Economics Department

Paul Wachtel

New York University - Stern School of Business

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Date Written: June 4, 2004


Using data from 1996 to 2000, we investigate the effects of ownership, especially by a strategic foreign owner, on bank efficiency for eleven transition countries in an unbalanced panel consisting of 225 banks and 856 observations. Applying stochastic frontier estimation procedures, we compute profit and cost efficiency scores taking account of both time and country effects directly. In second-stage regressions, we take these efficiency measures along with return on assets as dependent variables with dummy variables for ownership type, a variable controlling for bank size, and dummy variables for year and country effects as explanatory variables. Methodologically, our results demonstrate the importance of including fixed effects, especially country effects, and also suggest a preference for efficiency measures over financial measures of bank performance in empirical work on transition countries.

With respect to the impact of ownership, we conclude that privatization by itself is not sufficient to increase bank efficiency as government-owned banks are not appreciably less efficient than domestic private banks. Our results do support the hypothesis that foreign ownership leads to more efficient banks in transition countries. We find that foreign-owned banks are more cost-efficient than other banks and that they also provide better service, in particular if they have a strategic foreign owner. Moreover, the participation of international institutional investors is shown to have a considerable additional positive impact on profit efficiency, which is consistent with the notion that these investors facilitate the transfer of technology and know how to newly privatized banks. In addition, we find that the remaining government-owned banks are less efficient in providing services, which is consistent with the hypothesis that the better banks were privatized first in transition countries. Finally, efficiency declines with bank size, which could call into question government-orchestrated bank consolidation strategies. We conjecture that the presence of many small and efficient foreign greenfield operations in these transition countries may be responsible for this result.

JEL Classification: P30, P34, P52

Suggested Citation

Bonin, John P. and Wachtel, Paul and Hasan, Iftekhar, Bank Performance, Efficiency and Ownership in Transitition Countries (June 4, 2004). BOFIT Discussion Paper No. 7/2004, Available at SSRN: or

John P. Bonin (Contact Author)

Wesleyan University - Economics Department ( email )

Middletown, CT 06459
United States
203-685-2000 (Phone)

Paul Wachtel

New York University - Stern School of Business ( email )

44 West 4th St.
New York, NY 10012
United States
212-998-4030 (Phone)
212-995-4218 (Fax)


Iftekhar Hasan

Fordham University ( email )

NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006

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