Banking efficiency in transition economies: evidence from Central Eastern European banks

This paper investigates cost efficiency and its determinants in the CEE countries, providing cross-country and time series evidence, based on different cost function formulations. A stochastic frontier analysis using a Fourier flexible form and controlling for country effects produces a well fitting cost function. Efficiency estimates indicate a generally low level of cost efficiency. We, however, find some evidence of efficiency increasing over time. Within the cost functions as well as the efficiency estimates, we additionally encounter large differences in the results across countries. This paper, furthermore, gives first indications on the determinants of the efficiency levels in the CEE markets. Size, non-interest business (e.g., services) problem loans and bank typology explain differences in bank efficiency.