Efficiency of Banks: Recent Evidence from the Transition Economics of Europe - 1993-2000

European Journal of Finance, Vol. 13, No. 2, pp. 123-143

Posted: 13 Mar 2007

See all articles by H. Semih Yildirim

H. Semih Yildirim

York University - Atkinson School of Administrative Studies

George C. Philippatos

University of Tennessee, Knoxville - College of Business Administration

Abstract

This study examines the cost and profit efficiency of banking sectors in twelve transition economies of Central and Eastern Europe (CEE) over the period 1993-2000, using the stochastic frontier approach (SFA) and the distribution free approach (DFA). The paper follows a two-step approach: First, the efficiency estimates are obtained by employing a multi-product translog cost function. Then these estimates are regressed on a set of determinants. The managerial inefficiencies in CEE banking markets were found to be significant, with average cost efficiency level for 12 countries 72 and 76 percent by DFA and SFA. The alternative profit efficiency levels are found to be significantly lower relative to cost efficiency. According to SFA, approximately one-third of banks' profits are lost to inefficiency, and almost one-half according to the DFA. The higher efficiency levels are associated with larger size, higher profitability and equity. The level of competition and GDP growth are found to increase efficiency while market concentration is negatively linked to efficiency. Finally, foreign banks are found to be more cost efficient but less profit efficient relative to domestically owned private banks and state-owned banks.

Keywords: Bank efficiency, transition economies, stochastic cost frontier

JEL Classification: G21, P20

Suggested Citation

Yildirim, H. Semih and Philippatos, George C., Efficiency of Banks: Recent Evidence from the Transition Economics of Europe - 1993-2000. European Journal of Finance, Vol. 13, No. 2, pp. 123-143. Available at SSRN: https://ssrn.com/abstract=969522 or http://dx.doi.org/10.2139/ssrn.314894

H. Semih Yildirim (Contact Author)

York University - Atkinson School of Administrative Studies ( email )

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HOME PAGE: http://www.yorku.ca/yildirim/

George C. Philippatos

University of Tennessee, Knoxville - College of Business Administration ( email )

432 Stokely Management Center
Knoxville, TN 37996-0570
United States
(865) 974-1719 (Phone)

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