Are foreign banks in central and eastern Europe more efficient than domestic banks?

In this paper, we investigate the efficiency of banks in Central and Eastern Europe. The aim is to evaluate whether foreign-owned banks are more efficient than domestic banks and can therefore play a key role in energising the emerging financial systems in transition economies. Our measures of efficiency are based on standard microeconomic theory. Using a panel of 273 foreign and domestic banks located in Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Romania for the period 1995 – 1999, we estimate a system of equations, consisting of an augmented translog cost function and two cost share equations. We calculate measures of economies and scale and scope on a bank-by-bank basis, and compare across countries and across ownership forms. The evidence we uncover suggests three main results. First, banks in our sample European transition economies exhibit a reasonable degree of efficiency overall. Second, the mean foreign bank does not appear to be significantly different from the mean domestic bank in the sample economies: we mostly reject the hypothesis that foreign banks are more efficient than domestic banks in these economies. Third, we find little or no empirical evidence to sustain the argument that bank ownership (foreign versus domestic) is an important factor in reducing the banks’ total costs.