The determinants of bank efficiency and productivity growth in the Central and Eastern European banking systems

Alin Marius Andries, Alexandru Ioan Cuza University of Iasi

Abstract

In this paper we examine the determinants of the efficiency and productivity of the banking systems of seven central and east European countries during a five-year period, from 2004 to 2008. Two approaches are used to examine the efficiency of the banking industry in central and east European countries: stochastic frontier analysis and data envelopment analysis. The empirical results show that the average efficiency of banks in central and east European countries grew in the period analyzed. The improvement may be due to increased competition upon EU accession and the entry of foreign banks, as well as to extensive legislative changes that led banks to become more efficient. Based on the results, we see that the highest level of technical efficiency is recorded for the banking systems of Romania and the Czech Republic, and the lowest is recorded for Slovenia. Looking at the average efficiency scores for each country, we observe significant variation across the banking systems of the central and east European countries. Technical efficiency value estimates with the stochastic frontier analysis method range from 0.6275 in Slovakia to 0.8644 in Romania. To assess the level of productivity growth of the banking industry, a Malmquist productivity index is calculated using linear programming. In the analyzed period, on average, the productivity of banks had increased in 2008 by approximately 24.27 percent from 2004, an increase due especially to technological modification.