Economia

Bank Performance, Efficiency and Ownership in Transition Countries

John P. Bonin, Department of Economics Wesleyan University, Middletown, CT 06459 [e-mail] 860 685 2353

Iftekhar Hasan, Rensselaer Polytechnic Institute, Troy, NY [e-mail] 518 276 2525

Paul Wachtel, Stern School of Business New York University, New York, NY 10012 [e-mail] 212 998 4030

June 2003

1

Abstract

Using data from 1996 to 2000, we investigate the effect of extensive foreign ownership on the banking sectors in general and bank efficiency in particular for eleven transition countries. Our unbalanced panel consists of 220 banks and 830 observations. Using stochastic frontier estimation procedures, we compute profit and cost efficiency scores. From these raw scores, we calculate efficiency scores for a bank relative to the mean score of other banks in the same country. We use these four efficiency scores and a financial indicator, return on assets, as dependent variables in a set of regressions having ownership type, year, and bank size as explanatory variables. To check for robustness, we include GDP growth to control for country-specific effects in both types of regressions and balance sheet financial data in return-to-asset regressions only. Our results indicate that banking sectors in these countries became more efficient and more competitive toward the end of the 1990s. We find that ownership matters; government banks are less efficient than their private counterparts and majority foreign ownership generate higher efficiency scores. Moreover, we find that the participation by international institutional investors in foreign-owned banks, which occurs in about 10% of our observations, has an additional significant impact. Such banks earn higher returns on assets and are more efficient by the profit measure; however, these banks are not significantly more cost efficient. Hence, international institutional investors appear to be more interested