The Efficiency of Foreign and Domestic Banks in Central and Eastern Europe:Evidence on Economies of Scale And Scope
In this paper, we invoke standard microeconomic theory to model the efficiency of domestic and foreign banks in Central and Eastern Europe, in terms of economies of scale and scope. We estimate and test a system of equations, comprising an augmented translog cost function and two cost share specifications, on a panel of 273 foreign and domestic banks in Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania^ Poland and Romania over the period 1995 - 1999. The main findings are threefold. First, we find that, overall, banks in these European transition economies exhibit a reasonable degree of efficiency. Second, the evidence suggests that foreign banks are not really different from the average domestic bank in the sample transition economies; we generally reject the hypothesis that foreign banks are more efficient than domestic banks in these economies. Third, we do not find any empirical grounds to sustain the argument that bank ownership (foreign versus domestic) is an important factor in reducing bank operating costs.(original abstract)
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