Risk and efficiency in the Central and Eastern European banking industry under quantile analysis

Abstract

This paper estimates cost efficiency in the banking industry of 11 Central and Eastern European (CEE) countries over the period 1998–2005 using a quantile regression analysis. Our purpose is to investigate for the first time whether cost efficiency in CEE banks differs across quantiles of the conditional distribution. We employ stochastic frontier analysis across quantiles using the Distribution-Free Approach. The reported evidence demonstrates lower efficiency scores for higher conditional distributions. The paper goes further into a second-stage analysis to investigate how risk, measured by non-performing loans and loans loss provisions, affects bank efficiency across quantiles. This second-stage analysis finds that risk asserts a negative impact on cost efficiency, especially in high-order quantiles. Finally, the paper investigates the relationship between bank-specific ‘z’ variables, such as structural reforms, bank concentration and profitability, and cost efficiency across quantiles.