Determinants of Commercial Bank Performance in Transition: An Application of Data Envelopment Analysis

Abstract

Banking sectors in transition economies have variables. In addition to stressing the importance of some experienced major transformations throughout the bank-specific variables, the censored Tobit analysis 1990s. While some countries have been successful in suggests that: eliminating underlying distortions and restructuring their * Foreign ownership with controlling power and financial sectors, in some cases financial sectors remain enterprise restructuring enhance commercial bank underdeveloped and the rates of financial intermediation efficiency. continue to be quite low. * The effects of prudential tightening on the efficiency Grigorian and Manole estimate indicators of of banks vary across different prudential norms. commercial bank efficiency by applying a version of Data * Consolidation is likely to improve efficiency of Envelopment Analysis (DEA) to bank-level data from a banking operations. wide range of transition countries. They further extend Overall, the results confirm the usefulness of DEA for the analysis by explaining the differences in efficiency transition-related applications and may shed light on the between financial institutions and countries by a variety optimal architecture of a banking system. of macroeconomic, prudential, and institutional This paper-a product of the Private and Financial Sector Development Unit, Europe and Central Asia Region-is part of a larger effort in the region to disseminate the results of research on transition issues. Copies of the paper are available free from the World Bank,

The Intervening Effect of Global Financial Condition on the Determinants of Bank Performance: Evidence from Nigeria

“…The authors investigated the bank performance in the period of 1988 to 1995 in 80 countries and the result indicated differences in bank characteristics and macroeconomic variables as the determinants of net interest margin and bank profitability. In another panel country study, Grigorian and Manole (2002) investigated efficiency in commercial bank operations in transition countries in the period of 1995 to 1998. The study reported that foreign ownership and consolidation of banks enhanced commercial bank efficiency in transition countries.…”

Has Minority Foreign Investment in China's Banks Improved Their Cost Efficiency?

“…It is found that majority foreign-owned banks (defined as those banks in which foreigners held more than 50 percent of equity) were more efficient than majority domestic privatelyowned banks, which in turn were more efficient than majority domestic government-owned banks. Grigorian and Manole (2006) consider the determinants of bank performance in 17 eastern and central European economies over the period 1995-1998. They also first compute efficiency scores, except using data envelopment analysis (DEA) rather than SFA, before performing a second stage regression.…”

“…Foreign ownership was again found to be positively related to bank efficiency. Findings of the likes of Bonin et al (2005) and Grigorian and Manole (2006) serve to provide optimism regarding the impact that foreign investment might have had in the Chinese context. They do not, however, allow strong a priori expectations to be formed given that no Chinese bank has sold more than 30 percent of its equity to foreign investors.…”

“…Relative to majority domestic privately-owned banks, it is found that majority stateowned banks are significantly less efficient, majority foreign-owned banks are significantly more efficient, and banks with no majority ownership are not significantly different. As with Bonin et al (2005) and Grigorian and Manole (2006), it is difficult to draw implications from these results on the potential impact of minority foreign investment. Another potential problem is that the regulatory environment differed markedly amongst banks of the above ownership types.…”

Financial liberalization, financial regulation and bank efficiency: a multi-country analysis

“…The growth rate of economic development may positively influence the quality and the skill levels of banks (Claessens et al, 2001). INFL is included to capture potential inefficiencies due to price (high interest margin) and nonprice (excessive branches) behaviour of banks (Grigorian and Manole, 2002). INTR is used as a control variable in the cost function since interest costs are an important part of total banking costs (Fries and Taci, 2005).…”