Technical Change in Banking: Evidence From Transition Countries

This paper investigates the effect of technical change on the costs of banking firms operating in 11 Central and Eastern European countries using Fourier-flexible cost function specification for the period 1995-2002. A common cost frontier with country-specific variables is employed in order to take into account macro-economic and regulatory conditions that vary over country and time. Our findings suggest that the rate of reduction in costs resulting from technical change increased during the sample period. Banks operating in Hungary, Czech Republic and Poland benefited more from technical change than their counterparts. In terms of cost reduction, large banks benefited more from technical progress. This indicates that large banks are more able to change their optimal input mix in response to changes in technology.