Managerial behaviour and cost and profit efficiency in the banking sectors of Central and Eastern European Countries

This paper analyzes cost and profit efficiency as well as the managerial behaviour of banks in nine Central and Eastern European countries, providing crosscountry and time-series evidence on the run up period to EU accession from 1995 to 2002. A stochastic frontier analysis based on a Fourier flexible form indicates a generally low level of cost and profit efficiency. We also observe an increasing tendency over time in cost and profit efficiency, with significant differences among countries. Apart from looking at the determinants of cost and profit efficiency (e.g. asset quality, problem loans, risk, and environmental factors), we test several hypotheses on banks\u2019 managerial behaviour using a Granger causality approach. Even though a static analysis shows a negative correlation between problem loans and efficiency, we find no evidence supporting the bad management hypothesis according to which inefficiency triggers a decrease in asset quality. On the contrary results provide evidence for the bad luck hypothesis suggesting that the exogeneity of bad loans causes inefficiency.This paper analyzes cost and profit efficiency as well as the managerial behaviour of banks in nine Central and Eastern European countries, providing cross-country and time-series evidence on the run up period to EU accession from 1995 to 2002. A stochastic frontier analysis based on a Fourier flexible form indicates a generally low level of cost and profit efficiency. We also observe an increasing tendency over time in cost and profit efficiency, with significant differences among countries. Apart from looking at the determinants of cost and profit efficiency (e.g. asset quality, problem loans, risk, and environmental factors), we test several hypotheses on banks\u2019 managerial behaviour using a Granger causality approach. Even though a static analysis shows a negative correlation between problem loans and efficiency, we find no evidence supporting the bad management hypothesis according to which inefficiency triggers a decrease in asset quality. On the contrary results provide evidence for the bad luck hypothesis suggesting that the exogeneity of bad loans causes inefficiency.Diese Arbeit untersucht die Kosten- und Gewinneffizienz sowie das Managementverhalten von Banken in neun zentral- und osteurop\ue4ischen L\ue4ndern. Diesbez\ufcglich wird l\ue4nder\ufcbergreifende empirische Evidenz f\ufcr die Periode von 1995 bis 2002 im Vorfeld des EU-Beitritts dieser Staaten pr\ue4sentiert. Eine Analyse basierend auf dem \u201eStochastic Frontier Approach\u201c unter Verwendung einer \u201eFourier Flexible Form\u201c deutet auf ein im Allgemeinen niedriges Niveau der Kosten- und Gewinneffizienz hin. Im Zeitverlauf l\ue4sst sich ein Anstieg von Kosten- und Gewinneffizienz erkennen, wobei signifikante Unterschiede zwischen den L\ue4ndern offenbar werden. Erg\ue4nzend zu einer Analyse der Einflussfaktoren auf Kosten- und Gewinneffizienz (z. B. die Qualit\ue4t der Aktiva, das Volumen von Problemkrediten, die Risikoneigung der Bank sowie allgemeine Umweltfaktoren) werden mehrere Hypothesen in Bezug auf das Managementverhalten der Banken basierend auf einem Granger-Kausalit\ue4tsansatz getestet. Obwohl eine statische Analyse eine negative Korrelation zwischen Problemkrediten und Bankeneffizienz offenbart, muss die Hypothese, dass dies auf schlechtes Management zur\ufcckzuf\ufchren ist, verworfen werden. Vielmehr unterst\ufctzen die Ergebnisse die sogenannte \u201ebad-luck\u201c-Hypothese, gem\ue4 f der die durch exogene Einfl\ufcsse verschlechterte Kreditqualit\ue4t Ineffizienz verursacht