Regional and Ownership Drivers of Bank Efficiency

Abstract

The banking sector plays a major role in any economy, and it played a critical role in transition of Ukraine to a market economy. In this work, we investigate the hypothesis that, despite the tremendous growth and apparent prosperity that existed before the country was hit by the global financial crisis, the Ukrainian banking industry already suffered from significant inefficiencies. We estimate the intermediation-type efficiency of individual banks, and analyze how various bank- specific factors (e.g., type of ownership, regional aspects, level of risk as per Basel Accords, business model, size, etc.) explain the differences in the estimated levels of inefficiency across banks. Among other results, we find strong support for the conclusions from the agency theory: we find that banks that were 100% foreign- owned were significantly more efficient than locally owned and partially foreign- owned banks, on average and ceteris paribus and, in particular, regardless whether they were headquartered in the capital city or in a region, in the East or in the West of the country.