Privatization Matters: Bank Efficiency in Transition Countries

Abstract

To investigate the impact of bank privatization in transition countries, we take the largest banks in six relatively advanced countries, namely, Bulgaria, the Czech Republic, Croatia, Hungary, Poland and Romania. Income and balance sheet characteristics are compared across four bank ownership types. Efficiency measures are computed from stochastic frontiers and used in ownership and privatization regressions having dummy variables for bank type. Our empirical results support the hypotheses that foreign-owned banks are most efficient and government-owned banks are least efficient. In addition, the importance of attracting a strategic foreign owner in the privatization process is confirmed. However, counter to the conjecture that foreign banks cream skim, we find that domestic banks have a local advantage in pursuing fee-for-service business. Finally, we show that both the method and the timing of privatization matter to efficiency; specifically, voucher privatization does not lead to increased efficiency and earlyprivatized banks are more efficient than later-privatized banks even though we find no evidence of a selection effect. JEL Classifications: P30, P34, and P52 2

Regulations and Productivity Growth in Banking: Evidence from Transition Economies

“…However, owing to data unavailability for personnel expenses for a large number of observations in our sample, we rely on overhead expenses, which include personnel and other administrative expenses. Our approach is consistent with studies that examine the efficiency of banks in transition and other countries (see Altunbas et al 2001, Fries and Taci 2005, Bonin, Hasan, and Wachtel 2005a). For a recent survey on applications of DEA and Malmquist methods in banking, and a discussion on the inputs and outputs used, see Fethi and Pasiouras (2010).…”

“…Our study also relates to the third strand of literature that examines the performance of banks operating in transition countries. These studies, many of which focus on the new EU member states, explore various issues including the impact of ownership and privatization on bank efficiency (Bonin, Hasan, and Wachtel 2005a, 2005b) and profitability (Naaborg and Lensink 2008), efficiency convergence (Mamatzakis, Staikouras, and Koutsomanoli‐Filippaki 2008), whether technical progress reduces bank costs (Kasman and Kirbas‐Kasman 2006), how competition impacts bank efficiency and TFP growth (Brissimis, Delis, and Papanikolaou 2008), and whether BSR s influence efficiency (e.g., Koutsomanoli‐Filippaki, Mamatzakis, and Staikouras 2009, Fries et al 2006) or TFP growth (Brissimis, Delis, and Papanikolaou 2008). In general, the findings of the aforementioned literature are rather mixed.…”

“…14 14 As Bonin, Hasan, and Wachtel (2005a) suggest, until recently the information technology in transition countries was only basic, while the human capital necessary to make even prudent lending decisions and to price risk properly was sparse or nonexistent. Kazandjieva (2007) also points out that in the past, private banks in Bulgaria were lacking knowledge and experience to develop new products. …”

Who needs credit and who gets credit in Eastern Europe?

“…Concerns remain that small and opaque firms can be serviced only poorly by foreign banks (Detragiache et al, 2008), though the evidence is not unambiguous (Giannetti andOngena, 2008, 2009). 5 Further attention has been given to the impact of institutional and legal developments on 5 Using bank-level accounting data a complementary set of papers shows how financial sector liberalization has increased bank-efficiency in transition countries, e.g., Bonin et al (2005) and Fries and Taci (2005).…”

Origin and concentration

“…The remaining government‐owned banks are less efficient in providing services, which is consistent with the hypothesis that the better banks were privatized first in transition countries. Furthermore, Bonin, Hasan and Wachtel (2005b) demonstrate that foreign‐owned banks are most efficient and government‐owned banks are least efficient. In addition Fries and Taci (2005) show that private banks are more efficient than state‐owned banks and privatized banks with majority foreign ownership are the most efficient and those with domestic ownership are the least.…”