Efficiency in the Banking Industry: Evidence from Eastern Europe

Iliana Ilieva, Fordham University


This dissertation evaluates the performance of the banking industry in nine Central and Eastern European (CEE) countries for the period 1996–2001. The nine countries are: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia. After the fall of communism, the CEE countries were faced with a long process of restructuring and privatization that was accompanied by a severe decline in output, hyperinflation, and high levels of unemployment. After a considerable delay, the state governments privatized many banks by selling the majority of them to foreign owners. With the transfer of ownership and appropriate legislation, the CEE countries began to build sound banking systems. To assess the performance of the banking industry, this study estimates measures of technological progress and total factor productivity, and several other measures of efficiency. More specifically those measures include cost, profit, technical, allocative and scale efficiency scores. The efficiency indicators are calculated using a data envelopment analysis from the mathematical programming approach, and two econometric approaches: a distribution-free approach and a stochastic frontier analysis. To capture the effect of factors such as the size, risk or capitalization of a bank, or the effect of the economic growth, business environment, or legal institutions on the performance of the banking industry, this study regresses the calculated efficiency scores on bank- and country-specific variables. Overall, the results from the three estimation methods are fairly similar, confirming the robustness of the efficiency indicators. There is certain variability among countries, which can be explained by factors such as the bank's size, the country GDP growth rate, the inflation rate, the interest rate spread and the stock market capitalization.

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Recommended Citation

Ilieva, Iliana, "Efficiency in the Banking Industry: Evidence from Eastern Europe" (2003). ETD Collection for Fordham University. AAI3083152.