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This study examines the cost and profit efficiency of banking sectors in six transition countries of South-Eastern Europe over the period 1998-2008. Using a stochastic frontier approach, our analysis reveals that the average cost efficiency of South-Eastern European banks is 68.59 percent, and the average profit efficiency is 53.87 percent. Regressions on the determinants of bank efficiency show that foreign banks are characterized by higher profit efficiency but lower cost efficiency, and government-owned banks are associated with lower profit efficiency than domestic private banks. However, the efficiency gap between foreign-, domestic private-and government-owned banks narrows over time. We also find that the market power of a bank has a positive association with both cost and profit efficiency. Institutional development, proxied by progress in banking regulatory reforms, privatization and enterprise corporate governance restructuring, also has a positive impact on bank efficiency. We are grateful to the editor (Isabel Schnabel) and two anonymous reviewers for very helpful suggestions.

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This study examines the cost and profit efficiency of banking sectors in six transition countries of SouthEastern Europe over the period 1998-2008. Using the stochastic frontier approach, our analysis reveals that the average cost efficiency of SEE banks is 68.59% and the average profit efficiency is 53.87%. The second-stage regressions on the determinants of bank efficiency further show that foreign banks are associated with higher profit efficiency but moderately lower cost efficiency. Government banks are associated with lower profit efficiency. The efficiency gap between foreign banks, domestic private banks and government banks, however, has narrowed over time. We also find that the degree of individual banks' competitiveness has a positive association with both cost and profit efficiency. Finally, institutional development, proxied by progress in banking reforms, privatization and corporate governance restructuring, also has a positive impact on bank efficiency.

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