European financial crisis and bank productivity: evidence from Eastern European Countries

ABSTRACT

The paper examines the productivity levels of the largest banks operating in the Eastern European countries over the period of the ongoing European financial crisis. Specifically, the analysis covers the periods of U.S. subprime crisis, the global financial crisis and the sovereign debt crisis. By adopting a fully nonparametric framework, it provides a probabilistic version of a directional input-oriented Malmquist productivity index alongside with its main decomposition. The results from the analysis suggest that banks have faced a deterioration of their productivity levels between the examined periods. It is evident that during the initiation of European sovereign debt crisis, the banks have weakened their ability to utilize efficiently their inputs of production and their ability to realize scale economies.

KEYWORDS:

• Bank productivity
• European financial crisis
• directional distance functions
• nonparametric analysis

JEL CLASSIFICATION:

• C60
• D24
• G21

Acknowledgements

We would like to thank an anonymous reviewer of the journal for the useful and constructive comments that helped improve the paper. Any remaining errors are solely the authors’ responsibility.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Our sample contains banks from 11 Eastern European countries (bank number in brackets): Bulgaria (10), Croatia (25), Czech Republic (12), Estonia (4), Hungary (14), Latvia (14), Lithuania (7), Poland (18), Romania (13), Slovakia (6) and Slovenia (13)

² As we have used the minimum values of all inputs.

³ Note also that.

⁴ The LP programs 5 to 8 have been calculated under the assumption of variable returns to scale. However, by dropping the constrain we obtain the efficiency scores under the constant returns to scale assumption. Finally, for the construction of the productivity indexes we express the directional distance functions as Shephard’s input distance function (Cherchye, Kuosmanen, and Post 2001, 203).

⁵ Productivity and component values signify progress; signify decline and values signify stagnation.