Bank performance, efficiency and ownership in transition countries

https://doi.org/10.1016/j.jbankfin.2004.06.015Get rights and content

Abstract

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 taking account of both time and country effects directly. In second-stage regressions, we use the efficiency measures along with return on assets to investigate the influence of ownership type. 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. 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. 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.

Section snippets

Banking in the transition economies: The foreign factor

Banking sectors in transition countries differ from their counterparts in many developing and emerging market countries by the high percentage of assets held in banks with majority foreign ownership. The change in foreign participation in banking in these countries from the early transition years to the later ones is dramatic. This paper investigates the impact of extensive foreign ownership on the performance of banks in eleven transition countries. These countries are four northern European

Bank performance in transition countries: The literature

The banking literature on transition countries concludes that ownership matters; in particular, government ownership of banks is argued to be less efficient than private ownership (Bonin et al., 1998). As government-owned banks are privatized by sales of shares to foreign owners, Buch (1997) asserts that the foreign investors bring state-of-the-arts technology and human capital to domestic banks that are encumbered by the legacies of the centrally planned era. In addition, many foreign

The data and the ownership typology

Academic research has made widespread use of the bank financial statements provided by Thompson’s BankScope and Bureau van Dijk for close to ten thousand banks around the world from the early 1990s. However, the data for banks from less developed and transition countries require substantial editing before a reliable sample can be constructed. Careful review of these data is needed to avoid double counting of institutions, to choose the most appropriate accounting standards, and to exclude

Efficiency measures of bank performance

Stochastic frontier analysis (SFA) has been applied widely to banking and other industries since its introduction by Aigner et al. (1977). Recent econometric developments are summarized in Kumbhakar and Lovell (2000) and Berger and Mester (1997) discuss applications to banking. SFA starts with a standard cost or profit function and estimates the minimum cost or maximum profit frontier for the entire sample from balance sheet data. The efficiency measure for a specific bank observation is its

The effects of ownership on bank performance in transition countries

In this section, we examine empirically the effects of ownership on bank performance using ROA and efficiency scores. A cursory glance at Table 2 shows differences in the means of financial performance measures and bank characteristics by ownership category. Regarding average size, majority government-owned banks are almost twice as large as foreign-owned banks having a strategic owner. Foreign greenfield banks are included in the latter category so that their relatively small size may explain

Conclusion

Foreign participation in the banking sectors of these eleven transition countries has increased dramatically in the second half of the 1990s; the literature suggests that foreign ownership should result in better performing, more efficient banks. To examine this issue empirically, we take a sample of eleven transition countries and focus on bank efficiency scores derived from frontier estimations of both cost and profit functions. In contrast to previous empirical work, we include country and

Acknowledgment

The authors appreciate helpful comments from Oleh Havrylyshyn who was the discussant in Dubrovnik, Bill Greene and an anonymous referee. Financial support was provided by the World Bank project on bank privatization. The authors also appreciate research assistance from Mingming Zhou.

References (23)

  • J.P. Bonin et al.

    Toward market-oriented banking in the economies in transition

    • Cited by (0)

    1

    Tel.: +1 518 276 2525.

    2

    Tel.: +1 212 998 4030.

    View full text
    Copyright © 2004 Elsevier B.V. All rights reserved.