Are Larger Banks More Efficient in the Central Eastern European Countries?

Abstract

Theoretical background: The relationship between the size of banks and their efficiency has become an important subject for academics and policy makers in the recent decades. However, the outcomes of these studies are relatively divergent concerning the direction of this dependence.

Purpose of the article: The goal of this study is to assess how the size of banks affects their efficiency in the CEE countries in the years 2005–2017. Additionally, the relationship between the market concentration and banks efficiency is checked.

Research methods: The research covers 108 banks operating in eleven CEE countries. The efficiency scores are achieved through the SFA method and regressed with the individual bank characteristics and macroeconomic and sectoral variables.

Main findings: The results show that growing bank’s size and market share positively affect its efficiency. Additionally, higher concentration of the banking market has a similar effect. Higher inflation and GDP per capita decrease bank profit efficiency which can indicate that banks achieve the highest efficiency gains in less prosperous countries, however, in the low inflation environment. Additionally, banks’ efficiency is boosted with the growing development of the banking sector and increasing lending to the economy. Fast-growing banks tend to be more efficient, probably due to the positive effect of the financial leverage on profits.