Are foreign banks in Central and Eastern Europe more efficient than domestic banks?

One of the central issues in the move to a market economy by the transition economies of Central and Eastern Europe is the development of an efficient financial system. In most transition economies, a key policy element has been the opening up of the banking system to foreign competition at a relatively early stage in the transition process. The motivation for this policy is that foreign banks can immediately import financial management, organisational skills and general banking experience which are likely to be in short supply among domestic entrepreneurs. Foreign banks may therefore provide a clear competitive yardstick against which domestic banks can be evaluated by customers and regulators, and thus themselves develop efficient banking practises more rapidly. Irrespective of their precise motives, or methods of penetration, banks have rapidly become among the most important foreign investors in the European transition economies (Mathieson and Roldos 2001).2