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Bank performance in transition economies
This paper examines the performance of 515 banks in 16 transition economies
for the years 1994-99 based on their public financial accounts. We first
examine lending behaviour and probability distribution of bank profitability
to determine whether these banks exhibit behaviour and performance associated
with excessive risk-taking. While we do not find evidence of excessive
risk-taking on average where there is significant progress in banking and
related enterprise reforms, there may be a minority of poorly capitalised
banks that do take excessive risks, particularly where progress in reform is
less advanced. The paper then estimates cost and revenue functions based on a
model of banks as multi-product firms. The results indicate that banks'
performance differs significantly depending on the reform environment, as well
as the competitive conditions, in which they operate. Banks with high market
shares have higher costs and achieve lower margins on their loan and deposit
activities. Where there has been significant progress in banking and related
enterprise reforms, banks are making comfortable margins on loans and appear
to be offering competitive margins on deposits, though they are still
achieving overall negative returns on equity. By contrast, when substantial
reforms have not been undertaken, banks have been sustaining high negative
returns on loans, largely at the expense of depositors; in effect they have
been able to appropriate much of the tax that inflation levies on nominal
deposits, and have been using this revenue to prop up their weak loan
portfolios. Overall interest margins are declining over time but are
substantially higher in low-reform environments. The results indicate that an
appropriate policy and regulatory framework may be a necessary condition for
significant progress to be made.
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