Impact of European Integration on Efficiency and Productivity Growth of Romanian Banks

Abstract

In this paper we use a non-parametric stepwise approach to examine the efficiency and productivity of Romanian banking industry and its determinants in the face of European integration, during a five-year period, from 2004 to 2008. We limit our sample to this period in order to exclude the effect of the global financial crisis on production performance of the banking industry. Moreover, 2004-2008 is an important period because during this time frame, Romania was being considered for membership to European Union and for that reason Romanian authorities implemented a set of mandatory legislative improvements that accelerated the path towards market economy. We develop a two-stage empirical model that involves estimating bank performance in the first stage and assessing its determinants in the second one. In order to measure the productivity growth of the banking industry, we calculate Malmquist productivity growth index using a non-parametric linear programming approach.

Our results suggest that during the period under study, the privately-owned banks in Romania have been significantly more efficient and have enjoyed a higher productivity growth compared with the state-owned banks. Results of this research may offer directions to banking regulators for institution of suitable policies for encouraging banks to employ more efficient production practices and to supply high quality services at the lowest costs possible. The policy implication of our findings are a) Romanian banking firms should alter their “input mix” to reduce operational costs in order to enhance their efficiency and b) Romanian government authorities need to design regulatory acts to promote mergers and acquisition among banks to assist them to improve their overall efficiency by expansion and achieving optimal size.

DOI: http://dx.doi.org/10.5755/j01.ee.24.3.2922