Determinants of Commercial Bank Performance in Transition: An Application of Data Envelopment Analysis
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Determinants of Commercial Bank Performance in Transition: An Application of Data Envelopment Analysis DAVID A GRIGORIAN1 & VLAD MANOLE2 1
International Monetary Fund, Washington, DC 20431, USA. E-mail: [email protected] World Bank, 1818 H Street, N.W., Washington, DC 20433, USA. E-mail: [email protected]
2
Banking sectors in transition economies have experienced major transformations throughout the 1990s. While some countries have been successful in eliminating underlying distortions and restructuring their financial sectors, in some cases financial sectors remain underdeveloped and the rates of financial intermediation continue to be low. We estimate indicators of commercial bank efficiency by applying a non-parametric estimation technique, data envelopment analysis (DEA), to bank-level data from a wide range of transition countries. In addition to stressing the importance of some bank-specific variables, the censored Tobit analysis suggests that: (1) foreign ownership with controlling power and enterprise restructuring enhance commercial bank efficiency; (2) the effects of prudential tightening on the efficiency of banks vary across different prudential norms; and (3) consolidation is likely to improve efficiency of banking operations. Overall, the results confirm the usefulness of DEA for transition-related applications and shed some light on the question of the optimal architecture of a banking system. Comparative Economic Studies (2006) 48, 497–522. doi:10.1057/palgrave.ces.8100129
Keywords: banking sector development, economies in transition JEL Classifications: G21, G28, P23
INTRODUCTION Banking sectors in transition economies of Eastern Europe and Former Soviet Union have experienced major transformations throughout the
DA Grigorian & V Manole Commercial Bank Performance
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1990s. In the pre- and early-transition periods, state policies generally distorted resource allocation, as credit – subject to a variety of controls – was directed toward sustaining existing industries and maintaining living standards through explicit and implicit subsidies to enterprises and households. Since the primary role of the banking system was to channel funds to the real sector, efficiency and profitability were not among the top priorities. The banks were not engaged in evaluating the credit conditions of their borrowers, and therefore no risk management techniques were in use. Outdated statistical standards were designed to serve the objective of easy planning as opposed to disclosure of the true financial state of banks. While some countries in the region have been successful in eliminating underlying distortions and restructuring their financial sectors, in other cases financial sectors remain underdeveloped and the rates of financial intermediation continue to be quite low. This is especially alarming in light of mounting evidence of the effect of financial sector development on economic growth (see, for instance, Levine and Renelt, 1992 and King and Levine, 1993). Although par
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