BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 7/2004:
Bank performance, efficiency and ownership in transitition countries
John P. Bonin ()
, Iftekhar Hasan ()
and Paul Wachtel ()
Abstract: Using data from 1996 to 2000, we investigate the effects
of ownership, especially by a strategic foreign owner, on bank efficiency
for eleven transition countries in an unbalanced panel consisting of 225
banks and 856 observations. Applying stochastic frontier estimation
procedures, we compute profit and cost efficiency scores taking account of
both time and country effects directly. In second-stage regressions, we
take these efficiency measures along with return on assets as dependent
variables with dummy variables for ownership type, a variable controlling
for bank size, and dummy variables for year and country effects as
explanatory variables. Methodologically, our results demonstrate the
importance of including fixed effects, especially country effects, and also
suggest a preference for efficiency measures over financial measures of
bank performance in empirical work on transition countries. With respect to
the impact of ownership, we conclude that privatization by itself is not
sufficient to increase bank efficiency as government-owned banks are not
appreciably less efficient than domestic private banks. Our results do
support the hypothesis that foreign ownership leads to more efficient banks
in transition countries. We find that foreign-owned banks are more
cost-efficient than other banks and that they also provide better service,
in particular if they have a strategic foreign owner. Moreover, the
participation of international institutional investors is shown to have a
considerable additional positive impact on profit efficiency, which is
consistent with the notion that these investors facilitate the transfer of
technology and know how to newly privatized banks. In addition, we find
that 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. Finally, efficiency declines
with bank size, which could call into question government-orchestrated bank
consolidation strategies. We conjecture that the presence of many small and
efficient foreign greenfield operations in these transition countries may
be responsible for this result.
JEL-Codes: P30; P34; P52; (follow links to similar papers)
39 pages, June 4, 2004
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