Assessing the success of reform in transition banking 10 years later: an interest margins analysis

In this paper we assess the extent to which the banking sector in a set of transition countries has improved its efficiency. As an indicator for efficiency we employ net interest margins. Using a panel of banks, we test the effect of the transition process, the ownership status and the foreign banks entry on margins. The empirical model controls for differences in banks' financial profile by including a vector of financial risks as suggested by the dealership model. The findings indicate that margins have significantly decreased, implying that the overall transition process has been, to a certain extent, effective. Additionally, the entry of foreign banks has contributed to the reduction of margins. Finally, we find some evidence of inefficiency since margins are affected by the ownership status, where typically state-owned banks set significantly narrower margins. (C) 2003 Published by Elsevier Science Inc. on behalf of Society for Policy Modeling.