Heterogeneity of Technological Regimes and Banking Efficiency in Former Socialist Economies

Abstract

Cost efficiency of banks in 20 former socialist emerging economies is analyzed using a novel methodology - a latent class stochastic efficiency frontier model - that explicitly accounts for unobserved differences in technological regimes due to the heterogeneity of economic environments in which the banks are operating. We find that banking systems in former socialist emerging economies are characterized by three distinct technological regimes. Based on the estimated efficiency scores we group the countries in three categories and provide an intuitive interpretation of the existing regimes.

Keywords: cost efficiency, banking, latent class stochastic efficiency frontier model

JEL Classification: C81, D24