What drives bank performance in transitions economies? The impact of reforms and regulations

•We analyze the effects of financial regulations and reforms on the cost efficiency of banks of CEE countries for 2004-2009.•Panel regressions examine the impact of regulation on bank performance using the EBRD and the Fraser indicators.•We find that reforms on labor and business markets exert a positive impact on bank performance.•We find the effect of credit regulation banking on efficiency is positive.•We find that better capitalized banks are more cost efficient.

This paper investigates the effects of financial regulations and structural reforms on the cost efficiency of the banking industries of 10 Central and Eastern European (CEE) countries for the period 2004-2009. Cost efficiency scores are estimated using stochastic frontier analysis, whilst panel regressions examine the impact of regulation and liberalisation on bank performance using the EBRD transitional reform indicator and the Fraser economic freedom index. By considering both indexes we are able to account for the effects of progress towards more sound banking practices as well as the impact of the credit market, labor market and business sector regulatory regimes on bank efficiency. Our empirical analysis shows that structural reforms on labor and business markets exert a positive impact on bank performance. In line with the public interest view, we find the effect of credit regulation banking on cost efficiency is positive. We also find that better capitalized banks are more cost efficient.

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