Banking efficiency in transition economies

Abstract An increasing share of the banking sector is controlled by foreign capital in the majority of transition countries. To analyse the effects of this trend on the performance of the banking sector in these countries, this study conducts a comparative analysis of the performance of foreign‐owned and domestic‐owned banks operating in the Czech Republic and Poland. We use the stochastic frontier approach to compute cost efficiency scores. Following Mester (1996 ), financial capital is included in the cost frontier model to control for risk preferences. Our finding is that on average foreign‐owned banks are more efficient than domestic‐owned banks. We conclude, however, that this advantage does not result from differences in the scale of operations or the structure of activities.