BANK EFFICIENCY, EUROIZATION AND MACROPRUDENTIAL POLICY IN TRANSITION ECONOMIES- WITH SPECIAL REFERENCE TO SOUTH EAST EUROPEAN COUNTRIES

The literature on bank efficiency in transition economies (TEs) is neither exhaustive nor conclusive. It mainly investigates bank efficiency in relation to bank size and ownership. However, to the best of our knowledge, it ignores several important dimensions related to the banking sector in TEs: euroization, macroprudential policy and different types of risk. By exploring the relationships between bank efficiency, euroization, macroprudential policy and different types of risk in TEs, this research fills this gap.
The relationship between bank efficiency, euroization and bank risk is explored empirically through the estimation of a cost efficiency frontier using time-varying stochastic frontier analysis (SFA) whilst controlling initially for euroization at country level and then at bank level, using the BankScope database and euroization data collected by the author. The findings suggest that euroization at country level is a driver of bank efficiency in TEs, and that different risks are important in the context bank efficiency in TEs. Furthermore, it was shown that efficiency in TEs has varied over period and it has been affected by the Global Financial Crisis.
The initial research is extended through the qualitative analysis of the phenomena of euroization at bank level in selected South East European countries, which again to the best of our knowledge, is the first such research. The investigation is conducted through semi-structured interviews of risk managers of banks at different levels of seniority. The main finding of this analysis is that macroprudential policy, widely considered a useful response to global financial crisis, is an important determinant of euroization.
To explore this further an econometric investigation of the impact of macroprudential policy on the level of credit euroization in TEs, an aspect ignored in the literature, is undertaken. Additionally, the empirical literature on credit euroization is limited as most studies focus on deposit euroization, assuming that credit euroization mirrors it, although the latter is larger in most TEs. The analysis is conducted employing dynamic and autoregressive panel techniques, using data on macroprudential policy from the IMF and central banks. Thus, this study fills a gap in this literature by investigating the determinants of credit euroization, including the impact of macroprudential policy. Although this is a first attempt at such an investigation, it supports the importance of these policies in driving down the level of euroization in TEs.