The Baltic banking system in the enlarged European Union: the effect of the financial crisis on efficiency

Abstract

The main objective of this study is to analyse the evolution of banking efficiency in the Baltic countries after their accession to the EU and during the financial crisis, and to check whether there are significant differences between these countries as a consequence of their particular characteristics. To that end, we have estimated the evolution of cost and profit efficiency in the Baltic countries in the context of the enlarged EU during the period 2000–2013 using Bayesian stochastic frontier models. Our results show the greater robustness of Estonian banking in terms of profits during the financial crisis in comparison to their neighbours. Additionally, Baltic banking has recovered its profit efficiencies very quickly after the financial crisis. However, cost efficiency is still at low levels in line with the other European countries.

This work was supported by The Spanish Ministry of Economy and Competitiveness under Research Project ECO2012-35029 and ECO2016-79392-P; the DGA Project 269189/3 (Grupo Consolidado S11); Universidad de Zaragoza Project UZ-2016-SOC 07 269209, and Institut de Desenvolupament Social i Territorial (INDEST).