Heterogeneity of technological regimes and banking efficiency in former socialist economies

Cost efficiency of banks in 20 former socialist emerging economies is analyzed using a latent class stochastic efficiency frontier model that explicitly accounts for unobserved differences in technological regimes due to the heterogeneity of economic environments in which the banks are operating. We find that banking systems in former socialist emerging economies are characterized by three distinct technological regimes. Based on the estimated efficiency scores we group the countries into three categories and provide an intuitive interpretation of these three regimes.