An Examination of Banks’ Cost Efficiency in Central and Eastern Europe

Abstract

Abstract Using a heteroscedastic stochastic frontier model, we will investigate the commercial banks cost efficiency differences in six emerging countries from Central and Eastern Europe over the period 2005 to 2011. Also, we will highlight the determinants of banks cost efficiency. Our analysis is important because, the efficiency of commercial banks became essential for banks stability. The results showed that a high macroeconomic stability supports the efficiency of commercial banks. Also, banks which undertake higher risks are more inefficient. Therefore, banks with less liquidity, with a lower solvency rate and a higher credit risk are more inefficient than more cautious credit institutions. By analyzing the evolution of the cost index, we have noticed that the banks from all the banking systems included in our study managed to increase the level of efficiency until 2008. The year 2009 brought upon it a decrease of the efficiency for the banks from Poland, Romania, Russia and Hungary. At the same time, for the banks from Bulgaria and the Czech Republic we can notice a stagnation of the efficiency index.