POLICY
RESEARCH
WORKING
PAPER
2850
Determinants
of
Commercial
Bank
Performance
in
Transition
An
Application
of
Data Envelopment
Analysis
David
A.
Grigorian
Vlad
Manole
The
World
Bank
M
Europe
and
Central
Asia
Region
i
Private
and
Financial
Sector
Development
Unit
June
2002
Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized
I
POLICY
RESEARCH
WORKING
PAPER
2850
Abstract
Banking
sectors
in
transition
economies
have
variables.
In
addition
to
stressing
the
importance
of
some
experienced
major
transformations
throughout
the
bank-specific
variables,
the
censored
Tobit
analysis
1990s.
While
some
countries
have
been
successful
in
suggests
that:
eliminating
underlying
distortions
and
restructuring
their
*
Foreign
ownership
with
controlling
power
and
financial
sectors,
in
some
cases
financial
sectors
remain
enterprise
restructuring
enhance
commercial
bank
underdeveloped
and
the
rates
of
financial
intermediation
efficiency.
continue
to
be
quite
low.
*
The
effects
of
prudential
tightening
on
the
efficiency
Grigorian
and
Manole
estimate
indicators
of
of
banks
vary
across
different
prudential
norms.
commercial
bank
efficiency
by
applying
a
version
of
Data
*
Consolidation
is
likely
to
improve
efficiency
of
Envelopment
Analysis
(DEA)
to
bank-level
data
from
a
banking
operations.
wide
range
of
transition
countries.
They
further
extend
Overall,
the
results
confirm
the
usefulness
of
DEA
for
the
analysis
by
explaining
the
differences
in
efficiency
transition-related
applications
and
may
shed
light
on
the
between
financial
institutions
and
countries
by
a
variety
optimal
architecture
of
a
banking
system.
of
macroeconomic,
prudential,
and
institutional
This
paper-a
product
of
the
Private
and
Financial
Sector
Development
Unit,
Europe
and
Central
Asia
Region-is
part
of
a
larger
effort
in
the
region
to
disseminate
the
results
of
research
on
transition
issues.
Copies
of
the
paper
are available
free
from
the
World
Bank,
1818
H
Street
NW,
Washington,
DC
20433.
Please
contact
Sylvia
Torres,
room
H6-216,
telephone
202-473-9012,
fax
202-522-0005,
email
address
storres@worldbank.org.
Policy
Research
Working
Papers
are
also
posted
on
the
Web
at
http://econ.worldbank.org.
The
authors
may
be
contacted
at
dgrigorian@imf.org
or
manole@wueconc.wustl.edu.
June
2002.
(36
pages)
The
Policy
Research
Working
Paper
Series
disseminates
the
findings
of
work
in
progress
to encourage
the
exchange
of
ideas
about
development
issues
An
objective
of
the
senes
is
to
get
the
findings
out
quickly,
even
if
the
presentations
are
less
than
fully
polished.
The
papers
carry
the
names
of
the
authors
and
should
be
cited
accordingly.
The
findings,
interpretations,
and
conclusions
expressed
in
this
paper
are
entirely
those
of
the
authors.
They
do
not
necessanly
represent
the
view
of
the
World
Bank,
its
Executive
Directors,
or
the
countnes
they
represent.
Produced
by
the Research
Advisory
Staff
Determinants
of
Commercial
Bank
Performance
in
Transition:
An
Application
of
Data
Envelopment
Analysis*
David
A.
Grigorian
Vlad
Manole
At
the time
this
research
was
initiated,
David
A.
Grigorian
was
with
Private
and
Financial
Sector
Development
Unit,
Europe
and
Central
Asia
Region,
of
the
World
Bank.
He
now
works
at
the
Intemational
Monetary
Fund
and
can
be
reached
at
Dgrigoriani.mf.org.
The
coauthor
is
Vlad
Manole
from
Washington
University
who
can
be
reached
at
manoleawueconc.wustl.edu.
This
research
was
funded
by
the
ECA
Regional
Initiatives
Fund
of
the
World
Bank.
The
authors
would
like
to
thank
Anahit
Adamyan
for
excellent
research
assistance.
They
would
also
like
to
express
their
appreciation
to
colleagues
in
the
World
Bank
country
offices
in Belarus,
Bulgaria,
Croatia,
Hungary,
Moldova,
Romania,
Russian
Federation,
Slovak
Republic
and
Ukraine
for
their
help
in
putting
the
dataset
together.
Comments
and
suggestions
from
Biagio
Bossone,
Alex
Fleming,
Oleh
Havrylyshyn,
Giuseppe
Iarossi,
Roberto
Rocha,
and seminar
participants
at
the
World
Bank
at
various
stages
of
this
research
are
gratefully
acknowledged.
Chapter
1.
Introduction
Banking
sectors
in
transition
economies
of
Eastem
Europe
and
Former
Soviet
Union
have
experienced
major
transformations
throughout
the
1990's.
In
the
pre-
and
early-transition
periods,
state
policies
generally
distorted
resource
allocation,
as
credit
(subject
to
a
variety
of
controls)
was
directed
toward
sustaining
existing
industries
and
maintaining
living
standards
through
explicit
and
implicit
subsidies
to
enterprises
and
households.
Since
the
primary
role
of
the
banking
system
was
to
channel
funds
to
the
real
sector,
efficiency
and
profitability
were
not
among
the
top
priorities.
The
banks
were
not
engaged
in
evaluating
the
credit
conditions
of
their
borrowers,
and
therefore
no
risk
management
techniques
were
in
use.
Old
statistical
standards
were
designed
to
serve
the
objective
of
easy
planning
as
opposed
to
disclosure
of
the
true
financial
state
of
banks.
While
some
countries
in
the
region
have
been
successful
in
eliminating
underlying
distortions
and
restructuring
their
financial
sectors,
in
some
cases
financial
sectors
remain
underdeveloped
and
the
rates
of
financial
intermediation
continue
to
be
quite
low
(Table
1).
This
is
especially
alarming
in
light
of
mounting
evidence
of
the
effect
of
financial
sector
development
on
economic
growth
(see,
for
instance,
Levine
and
Renelt
(1992),
King
and
Levine
(1993),
etc.).
Although
part
of
the
success
across
countries
could
be
attributed
to
better
initial
conditions
1
and
achievements
of
early
macroeconomic
stabilization
programs,
the
importance
of
structural
reforms
were
the
dominant
force
behind
the
success
in
performance
(e.g.,
Berg
et
al.,
1999).
Progress
in
legal
and
regulatory
reforms,
enterprise
privatization,
price
and
external
trade
liberalization
were
partially
responsible
for
the
changes
occurring
in
some
transition
countries.
These
changes
manifested
themselves
not
only
in
the
financial
soundness
of
banking
institutions,
but
also
in
a
wider
range
and
sophistication
of
financial
services
provided
by
the
latter.
A
few
countries
in
the
region
were
able
to
transform
their
banking
sectors
from
a
state
where
dozens
of
small
banks
were
set
up
to
serve
individual
enterprises
(or
worse,
to
operate
as
scam
machines!),
to
a
state
where
putting
all
their
eggs
in
one
basket
is
considered
suicidal,
establishing
correspondent
relationships
with
major
Western
banks
is
a
matter
of
life
and
death,
and
internet
banldng
is
no
longer
a
luxury.
Reduced
availability
of
centralized
financing
encouraged
banks
in
I Yet
de
Melo
et
al.
(1997)
and,
subsequently,
Havrylyshyn
and
van
Rooden
(2000)
show
that
although
the
initial
conditions
were
important
in
defining
the
difference
in
performance
across
countries,
their
significance
diminished
over
time.
3