By drawing on Ukrainian experience, this paper analyzes the anatomy of bank efficiency in a transitional economy. Acknowledging the vast disparities in the business technology of different size banks, in this comprehensive study, we innovatively estimate group-specific (distinct) frontiers for small, medium, and large size banks. The results from separate frontiers reveal that Ukrainian banks record 38% technical inefficiency, 26% pure technical inefficiency, and 17% scale inefficiency on average. Apparently, banks in transition waste about the two fifths of their factor inputs during the production of financial services. The cardinal source of sub-performance in transitional banks seems to be managerial inefficiencies. We also found that banks operating in areas with more political influence and more developed infrastructure outperform the banks operating in politically and economically weaker regions. The results also indicate that larger banks, enjoying public trust in a risky business climate, dominate smaller banks in all forms of efficiency. However, such bias for size causes large banks to suffer from decreasing returns to scale and small banks from idle capacity. Consequently, the policies promoting consolidation between small and large banks may alleviate the excess (idle) capacity for large (small) banks in a transitional economy.
Aly, H.Y., Grabowski, R., Pasurka, C., Rangan, N., (1990), Technical, scale, and allocative efficiencies in U.S. banking: An empirical investigation, Review of Economics and Statistics 72, 211-218, DOI: 10.2307/2109710
Berger, A. N., Hancock, D., Humphrey, D. B., (1993), Bank efficiency derived from the profit function, Journal of Banking and Finance 17, 317-347, DOI: 10.1016/0378-4266(93)90035-C
________, Hannan, T.H., (1998), The efficiency cost of market power in the banking industry: A test of the quiet life and related hypotheses, Review of Economics and Statistics 80, 454-465.
_________, Hanweck, G. A., Humphrey, D. B., (1987), Competitive viability in banking: Scale, scope and product mix economies, Journal of Monetary Economics 20, 501-520.
_________Hunter, W.C., Timme, S. G., (1993), The efficiency of financial institutions: A review and preview of research past, present and future, Journal of Banking and Finance 17, 221-249, DOI: 10.1016/0378-4266(93)90030-H
________, Mester, L.J., (1997), Inside the black box: What explains differences in the efficiencies of financial institutions? Journal of Banking and Finance 21, 895-947, DOI: 10.1016/S0378-4266(97)00010-1
Bonin, J., Hasan, I., Wachtel, P., (2005), Bank performance, efficiency and ownership in transition countries, Journal of Banking and Finance 29, 31-53, DOI:10.1016/j.jbankfin.2004.06.015
Cebenoyan, A.S., Cooperman, E.S., Register, C.A., (1993), Firm inefficiency and the regulatory closure of S&Ls: An empirical investigation, Review of Economics and Statistics 75, 540-545, DOI: 10.2307/2109472
Chaffai, M., Dietsch, M., (1995), Should banks be ‘universal’? The relationship between economies of scope and efficiency in the French banking industry, Working paper. University Robert Schuman of Strasbourg, France.
Chang, C.E., Hassan, I., Hunter, W.C., (1998), Efficiency of Multinational banks: An empirical investigation, Applied Financial Economics 8, 1-8, DOI: 10.1080/096031098332727
DeYoung, R., (1994), Fee-based services and cost efficiency in commercial banks. Federal reserve bank of Chicago, Proceedings: Conference on bank structure and competition.
DeYoung, R., Hasan, I. (1998), The performance of de novo commercial banks: A profit efficiency approach, Journal of Banking and Finance 22, 565-587, DOI: 10.1016/S0378-4266(98)00025-9
DeYoung, R., Nolle, D. (1996), Foreign-owned banks in the U.S.: Earning, market share or buying it? Journal of Money, Credit and Banking 28, 622-636, DOI: 10.2307/2078074
Elyasiani, E., Mehdian, S., (1992), Productive efficiency performance of minority and nonminority-owned banks: A nonparametric approach, Journal of Banking and Finance 16, 933-948, DOI: 10.1016/0378-4266(92)90033-V
Fang, Y., Hasan, I. and Marton, K., (2011), Bank Efficiency in Transition Economies: Recent Evidence from South-Eastern Europe, Bank of Finland, Research Discussion Paper No. 5/2011. Available at SSRN: http://ssrn.com/abstract=1804923 or http://dx.doi.org/10.2139/ssrn.1804923.
Ferrier, G., Grosskoph, S., Hayes, K., and Yaisawarng, S., (1993), Economies of diversification in the banking industry: A frontier approach, Journal of Monetary Economics, 31, 229-49, http://dx.doi.org/10.1016/0304-3932(93)90046-I
Fries, S., Taci, A., (2005), Cost efficiency of banks in transition: Evidence from 289 banks in 15 post-communist countries, Journal of Banking and Finance 29, 55-81, http://dx.doi.org/10.1016/j.jbankfin.2004.06.016
Grigorian, D., Manole, V. (2002), Determinants of commercial bank performance in transition: An application of data envelopment analysis, World Bank Policy Research Working Paper 2850, June.
Guzman, M. G., (2000), The economic impact of bank structure: A review of recent literature, Economic and Financial Review, 11-25.
Havrylchyk, O. (2004), Efficiency of the Polish Banking Industry: Foreign versus Domestic Banks. Working paper, Department of Economics, European University Viadrina Frankfurt (Oder), Frankfurt, Germany, DOI: 10.2139/ssrn.499922
Hasan, I., Marton, K., (2003), Development and efficiency of the banking sector in a transition economy: Hungarian experience, Journal of Banking and Finance 27, 2249-2271, http://dx.doi.org/10.1016/S0378-4266(02)00328-X
Hassan, M.K., Isik, I., Mamun, A., (2010), Trade liberalization and industry performance in Bangladesh, Journal of Policy Modeling, Volume 32, Issue 3, Pages 399–417, http://dx.doi.org/10.1016/j.jpolmod.2010.02.005
Hermalin, B.E., Wallace, N.E. (1994), The determinants of efficiency and solvency in savings and loans, Rand Journal of Economics 25, 361-381.
Isik, I., (2008), Productivity, technology and efficiency of de novo banks: A counter evidence from Turkey, Journal of Multinational Financial Management 18(5): 427-442, DOI: 10.1016/j.mulfin.2007.11.004
Isik, I., Hassan, M. K. (2002), Technical, scale and allocative efficiencies of Turkish banking industry, Journal of Banking and Finance 26, 719-766, DOI: 10.1016/S0378-4266(01)00167-4
Isik, I., Hassan, M. K. (2003), Efficiency, ownership and market structure, corporate control and governance in the Turkish banking industry, Journal of Business, Finance and Accounting 30, 1363-1421, DOI: 10.1111/j.0306-686X.2003.05533.x
Isik, I., Kulali, I., Agcayazi-Yilmaz, B. (2016a), Total factor productivity change in the Middle East banking: The case of Jordan at the turn of the millennium, International Journal of Research in Business and Social Science, Volume 5, No 2.
Isik, I., Omran, M., Hassan, M.K., (2016b), How efficient are the commercial, investment and Islamic bank managers: Evidence from Jordanian experience at the turn of the century; in M. K. Hassan (Ed.), Handbook of Empirical Research on Islam and Economic Life, Edward Elgar, UK.
Isik, I. and Topuz, J. C., (2016), Meet the born efficient financial institutions: A post-entry study of de novo REITS, working paper, Rowan University, Glassboro, NJ, USA.
Klots, K. (2001), The Banking system and bank regulation in Ukraine – results of discord in political reform, Studies and Analysis. Center for Social and Economic Research, Warsaw.
Kovtun, A., (1998). Crisis: Support Only Healthy Ones. Zerkalo Nedeli. September 19, 1,7.
Kyj, L. and I. Isik, (2008), Bank x-efficiency in Ukraine: An analysis of service characteristics and ownership, Journal of Economics and Business 60(4): 369-393, DOI: 10.1016/j.jeconbus.2007.05.002
Mahajan . A., Rangan, N. Zardkoohi. (1996), Cost structures in multinational and domestic banking. Journal of Banking and Finance 20, 238-306, http://dx.doi.org/10.1016/0378-4266(94)00129-4
Mertens, A., Urga, G. (2001), Efficiency, scale and scope economies in the Ukrainian banking sector in 1998, Emerging Markets Review 2, 292-308, http://dx.doi.org/10.1016/S1566-0141(01)00022-X
Mester, L. J., (1993), Efficiency in the savings and loan industry. Journal of Banking and Finance 17, 267-286, http://dx.doi.org/10.1016/0378-4266(93)90032-9
_______(1996), A study of bank efficiency taking into account risk preferences, Journal of Banking and Finance 20,1025-1045, http://dx.doi.org/10.1016/0378-4266(95)00047-X
Miller, S.M., Noulas, A.G. (1996), Technical efficiency of large bank production. Journal of Banking and Finance 20, 495-509, http://dx.doi.org/10.1016/0378-4266(95)00017-8
Patrikatz, L., Krochmaluk, D., (2004), Problemy ta perspektyvy rozvitky bankivskoy systemy Ukrainy. Visnyk NBU, January, 38-43.
Pylypiv, Mariya I., (2011), Determinants of Efficiency and Liquidation in Transitional Economy: Evidence from Ukraine,2004-2010. SSRN: http://ssrn.com/abstract=1868350 orhttp://dx.doi.org/10.2139/ssrn.1868350
Saxonhouse, G.R. (1976), Estimated parameters as dependent variables, The American Economic Review 66, 178-183.
Yildirim, H.S., Philippatos, G.C., (2002), Efficiency of banks: Recent evidence from the transition economies, 1993-2003. Unpublished paper, University of Tennessee, April.
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.