Challenges and Prospects
Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald
Chapter 21: Estimating the gap in banking efficiency between Eastern and Western European economies
21. Estimating the gap in banking eﬃciency between Eastern and Western European economies Laurent Weill 1. INTRODUCTION There is a commonly accepted view that Eastern European banks are suﬀering from lower cost eﬃciency than Western European banks. Indeed Scholtens (2000) and Riess et al. (2002) notably argued that the current situation of banking sectors in transition countries of Eastern Europe lags behind the banking sectors of developed countries of Western Europe. The main reason underlying this rationale is that, in spite of the major transformation of the banking sectors in the transition economies of Eastern Europe during the 1990s, it is diﬃcult to modify the habits and behaviours inherited from the old regime within such a short period. The existence of a gap in banking eﬃciency between Eastern European and Western European countries is a very important question for two reasons. First, bank credit is by far the largest source of external ﬁnance for companies in the Eastern European countries (Caviglia et al., 2002). Indeed, the ﬁnancial markets are underdeveloped in transition countries, resulting in a high dependence on bank credit for ﬁnancing. Consequently, investment is particularly sensitive to the changes in banking performance in these countries. Indeed, an improvement of banking performance means a reduction of loan rates, but also a better allocation of ﬁnancial resources, and therefore an increase in investment that favours growth. Second, the upcoming EU membership of several transition countries renders the question of companies’ microeconomic performances more pertinent, and...
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