Determinants of Commercial Bank Performance in Transition: An Application of Data Envelopment Analysis

IMF Working Papers, September 1, 2002

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Canonical URL: Determinants of Commercial Bank Performance in Transition: An Application of Data Envelopment Analysis

Authors: David A. Grigorian, Vlad Manole
Date: September 1, 2002
Core objective: Estimate indicators of commercial bank efficiency in transition economies by applying a version of Data Envelopment Analysis (DEA) to bank-level data from a wide range of transition countries.
Context: Banking sectors in transition economies underwent major transformations throughout the 1990s; some countries eliminated underlying distortions and restructured financial sectors, while in others financial sectors remain underdeveloped and rates of financial intermediation remain low.
Methodological note: DEA is applied to bank-level data and results are further analyzed using censored Tobit analysis.

Foreign ownership with controlling power and enterprise restructuring enhances commercial bank efficiency.
The effects of prudential tightening on bank efficiency vary across different prudential norms.
Consolidation is likely to improve the efficiency of banking operations.
The results confirm the usefulness of DEA for transition-related applications and provide insight into the optimal architecture of a banking system.

Encouraging foreign ownership with controlling power can be associated with higher commercial bank efficiency in transition economies.
Enterprise restructuring (as captured in the analysis) is beneficial for bank efficiency.
Prudential policy tightening does not have uniform effects; effects depend on which prudential norms are tightened, implying that policymakers should consider differential impacts across prudential measures.
Banking sector consolidation may improve operational efficiency, suggesting potential benefits from policies that facilitate sensible consolidation.

Data scope: Bank-level data from a wide range of transition countries (1990s context).
Subjects: Banking; Commercial banks; Financial institutions; Financial markets; Financial sector development; Foreign banks; Loans; Nonbank financial institutions.
Keywords (as listed): Baltics, bank efficiency, bank performance, banking sector, Banking sector development, branch network, Commercial banks, EBRD enterprise restructuring index, economies in transition, Europe, Financial sector development, Foreign banks, intermediation function, Loans, Nonbank financial institutions, productivity indicator, rule of law affect bank-efficiency indicator, WP