Determinants of Efficiency and Liquidation in Transitional Economy: Evidence from Ukraine, 2004-2010

Abstract

Objective: This paper examines bank efficiency and probability of liquidation in Ukraine during the period of 2004-2010. This study is important both because of its relevance for the economy of Ukraine but also because of its implications for research on bank efficiency and capital structure requirements in developing countries.

Methods: Longitudinal data for 2004 and 2010 were obtained from the National Bank of Ukraine, which provides financial statements on all operating banks in Ukraine. Bank efficiency was measured as cost efficiency. Probability of liquidation as a function of bank efficiency and other predictors was calculated. Quantitative data were supplemented by survey results of bank insiders on factors that influence bank efficiency in Ukraine.

Findings: Efficiency of Ukrainian banks declined from 2004 to 2008 and then experienced growth gaining back its peak by the end of 2010 due to increased levels of capitalization. However, the estimates ranged from 0.3 to 0.53 during 2004-2010 so overall Ukraine’s banks still remain inefficient. Bank size and bank ownership were significant predictors of bank efficiency, along with macro-characteristics. Interestingly, a number of interactions of bank size and ownership by types of assets were significant predictors of efficiency. Age, number of owners, owner’s origin, as well as financial ratios predicted bank liquidation. Using supplemental survey data, bank liquidity and employee competence were identified as key factors for efficiency, while corruption and insolvency of debtors were ranked as less important.

Conclusions: The findings reveal a tradeoff where banks with lower capital to total assets ratios had greater probability of going bankrupt, and those with greater ratio of securities to total assets had higher probability. Banks with high levels of capitalization had lower efficiency, while those with higher levels of securities had higher. Findings extend previous research on the effects of foreign-ownership and bank size on cost efficiency and bankruptcy and illustrate the importance of economic conditions for the improvement of the banking sector in Ukraine. They also support the notion that inefficient financial organizations should maintain high capitalization.

Keywords: Capital structure, efficiency, foreign ownership, liquidation