European Economic Integration and South-East Europe
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European Economic Integration and South-East Europe

Challenges and Prospects

Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald

With both transition dynamics and the EU integration process having shifted to the south-east of Europe, a region fairly marginalized in the literature, this book fills a gap by taking stock of where South-East Europe’s economies and institutions stood in 2004. The authors evaluate the potential for investment and growth within the South-East European region, including the role of trade and FDI, and discuss the challenges associated with unemployment, poverty and ‘brain drain’. The book also provides insights into the particular monetary and exchange rate policies applied, including cases of ‘euroization’, and finally makes an assessment, against this background, of the European perspective of the countries of South-East Europe.
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Chapter 21: Estimating the gap in banking efficiency between Eastern and Western European economies

Laurent Weill


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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