Marko Kosak

Bank efficiency differences in the new EU member states

Abstract This article examines bank cost efficiency for five new EU Member States from Central and Eastern Europe and the three Baltic States for the period 1996 – 2006. The banking sectors in the selected set of countries had undergone a remarkable transformation before they achieved EU membership in 2004. We study cost efficiency differences between countries as well as efficiency improvements fostered by intense legislative and regulatory changes and extensive structural and institutional reforms carried out simultaneously. By employing the SFA approach an improvement in cost efficiency was discovered in the period investigated. Some noticeable differences in average cost efficiency among banking sectors can be detected as well. Empirical results also reveal certain significant associations of cost efficiency with country level macroeconomic characteristics, structure of the banking industry, and individual bank features. Analysis of correlating factors shows that the level of competition in the banking sector plays a more important role for cost efficiency improvements than the ownership structure itself. These results might be of interest to policy makers and regulatory authorities as they may provide help in detecting policy measures to create a business environment which would further enhance the cost efficiency of CEE banks.

Quality of Bank Capital and Bank Lending Behavior During the Global Financial Crisis

Using a worldwide bank sample from 2000 to 2010, this article analyzes the determinants of bank lending behavior during the global financial crisis highlighting the role of bank capital. It reveals that the high quality of the bank funding strategy (tier 1 bank capital and retail deposits) and prevalent government backing were crucial to continuous bank lending during the crisis period. This effect was especially pronounced in non-OECD and BRIC countries. We also point out that, although higher use of tier 2 capital and interbank deposits could be important for increased lending during a normal period, this did not support lending activities during the financial crisis. The article concludes by suggesting that in crisis periods high-quality bank capital is a banks competitive strength.

Distribution of personal income tax changes in Slovenia

Slovenia belongs to a group of EU member states that have reduced their personal income tax burden during the late-2000s financial and economic crisis. The latest changes, introduced in the personal income tax system during the last two years, have primarily reduced the tax burden on low-income taxpayers. However, this was only the last step in a series of personal income tax reforms since 2004 that have reduced the average tax burden on all taxpayers. Using an exclusive database of taxpayers and utilising a general-equilibrium modelling platform, an approach that is unfortunately still rare in Central and Eastern European countries, we assess the consequences of these reforms at both the micro and the macro level. From a macroeconomic point of view, the initial positive consequences of higher private consumption and welfare are declining over time owing to the increased budget deficit and reduced investment.

Accounting for heterogeneity in cross-country bank efficiency comparisons

In this article, we investigate the significance of the heterogeneity problem in banking efficiency research by using stochastic frontier techniques. The cost frontier function is estimated on a sample of banks from new European Union members from Central and Eastern Europe and the Baltics (CEEB) for the 1998–2007 period. The results imply that environmental variables can only partly control for the presence of heterogeneity in the sample. By employing the ‘true’ random‐effects model as originally proposed by Greene (2005a, 2005b), the unobserved heterogeneity that is typically associated with the complexity of the banking environment is additionally taken into account. This approach is found to result in considerably smaller differences in average country efficiency levels, which implies that CEEB countries represent a relatively homogeneous group in terms of bank performance.

From PAYG to Private Pensions: Income Gaps, Asset Allocation and Diversification Benefits

Current demographic dynamics driven by low fertility and increasing longevity requires adjustments of the traditional frameworks of providing pensions. In this article we highlight three crucial issues policymakers should address by implementing those adjustments. First, fiscal limitations given the current and projected demographic dynamics will dramatically reduce PAYG pensions. Without sufficient savings during the active period, individuals will increasingly end up in poverty. Their savings will not be enough to support their desired consumption in old age. Second, we highlight the impact of the asset allocation decision and the general public’s related lack of awareness on this issue. Therefore, we argue that financial illiteracy about both required savings and about decisions on appropriate asset class play a significant role in determining the well-being of masses in the not-so-distant future. Third, we argue that shift towards private pension away from the PAYG is expected to come with substantial benefits stemming from diversification among conceptually different sources of pension income.

Welfare Loss by the Financially Illiterate and Ignorant: Value of Private Pension Savings and Allocation

Population ageing requires adjustments to the traditional way of providing pensions though pay-as-you-go (PAYG) systems. Governments should prepare sound frameworks for a sustainable long-term shift towards private pensions, either in the form of second or third pillar or even better both of them. Namely, under demographic dynamics being driven by low fertility and increasing longevity both deteriorating the populations dependency ratio, private pension systems are more efficient than traditional PAYG. This paper makes two main points. First one is relatively straightforward. Fiscal limitations under current and projected demographic dynamics will dramatically reduce PAYG pensions. Without saving sufficient amounts during the active period, individuals will be increasingly ending up in poverty. Their savings will not be enough to support their desired old age consumption. Second point, highlights an impact of the asset allocation decision and related lacking awareness of general public regarding this issue. Under the assumption that people are literate enough and they save for their pensions, they might suffer opportunity losses because of the ignorance of appropriate allocation of their savings to various asset classes. Namely, we show in this paper there is a huge difference in outcomes under alternative asset allocation decisions. Those differences represent shortfalls in pension wealth. Therefore, we argue that both illiteracy about required saving on one hand and ignorance about the appropriate asset class decision on the other will play crucial role in determining well-being of masses in the not so distant future if the points we make in this paper are not taken to knowledge.