Bank productivity in CESEE countries

This paper looks at the performance of commercial banks in Central, Eastern and Southeastern Europe (CESEE). More specifically, we investigate the productivity growth components and capacity utilization in 11 CESEE EU member states as well as six non-EU countries in the Western Balkans during the period 2011 to 2019. First, we apply the methodology of Kumbhakar et al. (2014) to explain the components of total factor productivity (TFP) growth. Our results suggest that TFP growth is positive in the Western Balkan countries and negative in the CESEE EU member states, largely owing to differences in economies of scale and technical change. When controlling for heterogeneity between banks in these two regions and disentangling permanent and time-varying inefficiency, banks from CESEE Western Balkans countries still appear to be more efficient; the differences are, however, much smaller. Finally, we apply the dual cost approach by Berndt and Fuss (1986) to estimate the capacity utilization of banks. We find that banks in the CESEE EU member states have a lower capacity utilization than banks in the Western Balkans. However, cost-to-income ratios across the two regions are comparable, as Western Balkan banks generate far lower assets per employee and per fixed assets. We also find significant differences between smaller and larger banks in the two regions, with smaller banks apparently catching up with larger ones. Based on these findings we provide some policy recommendations. Overall, given the expected worsening of asset quality due to the COVID-19 pandemic and increasing competition by fintech companies, banks in both Regions need to increase their efforts to move closer to the efficiency frontier.