Determinants of Bank Cost Efficiency in Transition Economies: Evidence for Latin America, Central and Eastern Europe, and South-East Asia

Determinants of Bank Cost Efficiency in Transition Economies: Evidence for Latin America, Central and Eastern Europe, and South-East Asia

DOI: 10.4018/978-1-5225-9269-3.ch001

Abstract

This chapter leads a complex research study on the determinants of bank cost efficiency in transitional economies based on empirical evidence for Latin America, Central, and Eastern Europe, and South-East Asia. The empirical results suggested that banks, which follow a more cautious strategy, characterized by lower risk appetite and average expectations on profitability, have higher cost efficiency. Moreover, the empirical evidence highlighted the fact that a higher gross domestic product growth rate implies an increase in the inefficiency level, indicating an unsustainable bank management behavior, which in periods of economic growth adopts policies that can generate inefficiency in order to gain market share and to obtain higher bonuses. The global financial crisis has had a high negative impact on the banking system in transition economies.
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Introduction

The establishment of an efficient and solid banking system is an essential condition for sustainable economic growth. This condition is much more important for the countries in transition towards a market economy. Over the past few decades, banking systems in emerging countries have undergone significant structural reforms. In the early 1990s, most of the countries in our study had implemented financial liberalization policies and had reorganized their banking systems. Thereafter, there were periods when these banking systems passed through financial crises, such as the financial crisis in Asia or the financial crisis in Argentina, but there were also periods of economic growth combined with the expansion of the banking sector. An authentic test for the stability of banking systems in the countries in transition was presented by the financial crisis beginning in 2008 that affected, to a higher or lesser degree, the majority of the economies.

Jeanneau (2007) considered that the banking systems of many countries in Latin America have experienced boom and bust cycles and frequent crises, which have exacerbated economic fluctuations. Figueira et al. (2009) asserted that countries in Latin America adopted reforms, such as the privatization of state-owned banks and the encouragement of foreign capital, in order to increase the efficiency of the banking sector. Also, there was an increase in the share of bank assets owned by foreign investors in these countries.

In the countries of Central and Eastern Europe, the main challenge was represented by the transformation of socialist banking systems into market-oriented ones. Koutsomanoli-Filippaki et al. (2009) showed that most of the countries in Central and Eastern Europe adopted similar measures to ease the transition to a market economy: they introduced a two-tier banking system, restructured and privatized state-owned banks, liberalized interest rates and capital accounts and established a new legal and supervisory banking framework. In Central and Eastern Europe, a significant percentage of banks’ assets is owned by foreign capital (Claessens & van Horen, 2012). Klingen (2013) considered that the economies of Central and Eastern Europe suffered more than did those of any other region in the world, due to the global financial crisis that ended various unsustainable domestic booms.

In the countries of South Eastern Asia, financial liberalization programmes were implemented during the early 1990s in order to increase the competitiveness of the national banking sectors (Williams & Nguyen, 2005). The Asian financial crisis, which began in 1997, was a period with negative implications for these banking systems. The last decade witnessed a significant development of the banking systems in this region. Moreover, Montoro and Rojas-Suarez (2012) showed that the real credit growth in Asia was quite resilient to the international crisis, while the real credit growth in the countries of Eastern Europe was drastically affected. Latin America lay in the middle.

The aforementioned aspects fundamentally modified the way in which banks operate, as they were forced to reconsider their strategies. Therefore, bank performance and efficiency acquired an increasingly important role. In this study, we propose to compare the cost efficiency level between the emerging countries from different regions and to emphasize the determinants of the level and variability of cost efficiency over the period 2005 to 2011. Cost efficiency is estimated using a Stochastic Frontier Analysis (SFA). More specifically, we adopted Wang’s (2002) heteroscedastic stochastic frontier model, which allowed us to specify both the mean and the variance of the inefficiency turbulence and to investigate the nonmonotonic effects on efficiency. The contribution of our study to the existent literature is significant from many points of view.

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