Banking efficiency in Central and Eastern Europe

This paper analyzes cost and profit efficiency in Central and Eastern European countries, providing crosscountry and time series evidence. A stochastic frontier analysis using a Fourier flexible form produces well-fitting cost and profit functions. Efficiency estimates indicate a generally low level of cost efficiency and an even lower level of profit efficiency. However, we also find some evidence of increasing cost efficiency and, to an even stronger extent, profit efficiency over time. Furthermore, we decompose the inefficiency values obtained from the cost and profit function estimates and thereby gain information about the level of banking efficiency across countries. Finally, we detect differences in efficiency across size and specialization and thereby provide an insight into the reasons for efficiency differences.

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