Assessment of cost efficiency in the banking sector of selected countries in Southeastern Europe

Abstract

This study examines the assessment of cost efficiency in the banking sector of selected countries in Southeastern Europe. In Southeastern Europe (SEE), where over 100 commercial banks operate, these institutions form the backbone of the financial sector, supporting between 80% and 90% of the financial system in five Balkan Peninsula nations. Kosovo stands out for having a lower participation rate (65%), with 80% to 90% of its banks under foreign government control. A study conducted from 2010 to 2021 employed Data Envelopment Analysis (DEA), a non-parametric technique, to scrutinize the cost-effectiveness and profitability of SEE's banking industry. DEA evaluated SEE's commercial banks in terms of cost efficiency, considering total costs as the dependent variable and inputs including deposits, workforce, and fixed assets. Interest expenses, personnel expenses, and capital-related expenses were compared concerning total deposits and assets, while securities and loans served as outputs. The findings unveiled commendable cost efficiency within SEE's banks. Subsequently, a panel regression analysis utilizing fixed and random effects was performed. Factors like Cost Efficiency, Asset Quality, Market Participation, Debt Ratio, Bank Size, Inflation, Ownership, and Gross Domestic Product were assessed against Return on Equity (ROE) and Return on Assets (ROA). The results underscored robust cost control measures within SEE's banks and highlighted significant factors—Cost Efficiency, Asset Quality, Market Participation, Debt Ratio, Bank Size, Inflation, and Ownership—exerting substantial influence on ROA and ROE. These insights offer valuable information for strategic decision-making, aiding stakeholders in developing targeted actions to enhance the financial sustainability and stability of Southeastern Europe's banking sector.