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Privatization, Foreign Bank Entry and Bank Efficiency in Croatia: A Fourier-Flexible Function Stochastic Cost Frontier Analysis

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  • Evan Kraft
  • Richard Hofler
  • James Payne

Abstract

Using bank balance sheet data for 1994-2000, this paper estimates a Fourier-flexible frontier cost function. Specification tests indicate that the stochastic frontier model with a Fourier-flexible form with a truncated normal distribution of the inefficiency term allowing for time varying technical efficiency is preferred. The results show that new private and privatized banks, contrary to some expectations, are not the most efficient banks through most of the period. Privatization also does not seem to have an immediate effect on improved efficiency. However, better cost efficiency is associated with a lower likelihood of failure, suggesting that better risk management and better cost management are signs of better management in general. Finally, foreign banks have substantially better efficiency scores than all categories of domestic banks.

Suggested Citation

  • Evan Kraft & Richard Hofler & James Payne, 2002. "Privatization, Foreign Bank Entry and Bank Efficiency in Croatia: A Fourier-Flexible Function Stochastic Cost Frontier Analysis," Working Papers 9, The Croatian National Bank, Croatia.
    • Handle: RePEc:hnb:wpaper:9
    as

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    References listed on IDEAS

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    1. Berger, Allen N. & Mester, Loretta J., 1997. "Inside the black box: What explains differences in the efficiencies of financial institutions?," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 895-947, July.
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    More about this item

    Keywords

    envelopment analysis; efficiency frontier; operating approach; intermediation approach; Croatia; banks;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics

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