Bank efficiency in Croatia: A stochastic-frontier analysis

Since the liberalization of banking in 1990, the number of banks in Croatia has more than doubled. Using stochastic-cost frontier methodology and data for 1994 and 1995, we estimate X-efficiency and scale-efficiencies for both old and new, state and private banks. New banks are shown to be more X-inefficient and more scale-inefficient than either old privatized banks or old state hanks. However, new, private banks are highly profitable. Consequently, a negative, but only weakly statistically significant relationship between profitability and X-efficiency emerges in Croatia. This abnormal situation has been the result of free-riding opportunities created by distressed borrowers, limited competition, and start-up difficulties at the new banks. (C) 1998 Academic Press.