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Bank Performance, Efficiency and Ownership in Transition Countries

Explore banking sector evolution in transition countries, impact of ownership on performance, significance of foreign participation, and efficiency improvements. Findings reveal importance of ownership, role of international institutional investors, and competitive dynamics.

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Bank Performance, Efficiency and Ownership in Transition Countries

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  1. Bank Performance, Efficiency and Ownership in Transition Countries John P. Bonin Wesleyan University  Iftekhar Hasan Rensselaer Polytechnic Institute  Paul Wachtel Stern School of Business, New York University

  2. Banking Developments in Transition Countries • Rapid evolution from planned economy era • Fall in government ownership • Greenfield banks • Foreign participation • High compared to other emerging markets • Dramatic increase in late 1990s

  3. Hypotheses explored • Banking sectors are becoming more efficient • Spillover effects of foreign participation • Foreign-owned banks perform better • Ownership matters • Government vs. Private • Foreign vs. Domestic

  4. Related literature • On efficiency improvements in transition banking • Buch (1997) and (2000), Fries and Taci (2002), Fries, Neven and Seabright (2002), Drakos (2002), Claessens, Demirguc-Kunt, and Huizinga (2001) • On importance of ownership • IMF(2002), Nikiel and Opiela (2002), Hasan and Marton (2003)

  5. Data • Bankscope bank data • 11 advanced transition countries (Eastern Europe and the Baltics) • Financial statements 1996-2000 • Ownership information 1999 • Exclude non-bank intermediaries • Total of 830 bank-year observations with financial data and ownership information • Country coverage • Poland, Croatia, and Hungary ~ 45% • Baltics ~ 13%

  6. Ownership Characteristics(of bank observations) • Majority Foreign 59% • Less than one-half in Croatia, Slovenia and Latvia • Majority government 10% • Largest in Slovakia 14% • Majority private domestic 31% • Only Croatia, Slovenia and Latvia above one-half • Participation of international institutional investor 10% • Bulgaria, Estonia, Romania above 20%

  7. Balance Sheet Characteristics

  8. Efficiency Estimation • Stochastic Frontier analysis • Profit and Cost efficiency functions • Standard translog specification • Efficiency measures • Raw efficiency – distance from frontier • Relative efficiency – distance relative to mean for all same country bank observations

  9. Performance compared to overall mean

  10. Performance Measures

  11. Regression analysis of Performance measures • Independent variables • Log of asset in constant $ • Fixed effects for year • Dummy variables for ownership characteristics • Additional robustness tests • Balance sheet ratios effects on ROA Ratios to assets of loans, deposits, non-interest expenditures • Real GDP growth

  12. Explanations of Performance • ROA declines over time – banking becoming more competitive • Efficiency improves after 1998 • Better bank performance in countries with higher growth • Larger banks generally less efficient • Banks with larger deposit base (retail banks) have lower ROA

  13. Ownership effects on performance • Govt. banks less efficient than private • Foreign-owned banks more efficient than other private banks in same country • Presence of international institutional investors (most frequently EBRD) has important impact • Higher ROA • More profit efficient but not more cost efficient

  14. Why do international institutional investors matter? • Cherry-picking • They successfully choose the most profitable banks for their investment portfolios • Technology and Knowledge Transfer • Transfers facilitate the development of banks • Signaling or Screening • Investments provide information about quality of banks • Imprimatur of ‘official’ investors attracts customers

  15. Size and year effects (Table 6, cols. 1 & 2)

  16. Ownership Effects(Table 6, columns (1)-(3))

  17. Additional Tests(Table 7, columns (1),(3) and (6))

  18. Conclusions • Increased foreign participation leads to more efficient and competitive banking sectors in advanced transition countries • Private banks are more efficient than govt. owned banks • Foreign owned banks are more efficient than private banks • International institutional investors ‘cherry-pick’

  19. Things to do • Differentiate foreign greenfield operations from foreign ownership of formerly state owned banks • Additional dummies for country clusters, e.g., Baltics, Northern-tier (Czech R., Hungary, and Poland) • Relative to maximum efficiency in country vs. average efficiency • Random effects estimation

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