Banking Inefficiency in Central and Eastern European countries under a Quadratic Loss Function

This paper employs a specification of a quadratic loss function based on forward looking rational expectations to model the underlying dynamics of efficiency scores in the banking industry of eleven Central and Eastern European countries over the period 1998-2005. Results show that there is considerable variation in the adjustment speed to the long run equilibrium across banking systems and over time, while it also appears that the recent accession to the EU has not led to the expected increase in the speed of adjustment to the long run equilibrium. Moreover, banks’ ownership structure appears to assert an influence on the speed at which credit institutions correct their past-period inefficiency.