Determinants of Commercial Banks’ Efficiency: Evidence from 11 CEE Countries

Abstract

This study estimates bank efficiencies and their determinants for a sample of 11 Central and Eastern European Countries (CEEC) over the 2005–2008 period. Contrary to previous studies, we estimated cost and revenue efficiency using Data Envelopment Analysis (DEA), which allowed us to focus on both the input and output sides of banks’ efficiency. Our second stage analysis includes testing of the separability assumption and estimation of the truncated regression developed by Simar and Wilson (2007). We found evidence that: i) the size and financial capitalization of the bank are positively associated with cost and revenue efficiency; ii) foreign banks in CEEC are more cost efficient but less revenue efficient than domestic banks, suggesting different banking behavior between foreign and domestic banks; and iii) the loans-to-assets ratio was negatively associated with cost efficiency but positively associated with revenue efficiency, further stressing two different aspects of banking behavior in CEEC.

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