OREANDA-NEWS. Bank efficiency studies conclude that in the early 2000s Ukraine had a relatively inefficient banking system compared to other transition economies. Besides other factors, it was the low number of cross-border takeovers and the resulting low level of strategic foreign ownership that were often blamed for this inefficiency.

From the mid-2000s onwards, Ukraine experienced a surge in the number of cross-border bank takeovers. In the span of just two years, 2005 and 2006, the number of banks that were majority foreign owned jumped from two to 14.

In this Working Paper Muzaffarjon Ahunov, Office of the Chief Economist, EBRD and Leo Van Hove and Marc Jegers, Professors, Free University Brussels (VUB), explore whether these cross-border takeovers have improved the efficiency of the Ukrainian target banks.

Acquired banks and banks not acquired by foreign banks were not necessarily fully comparable in the pre-takeover period, so their post-takeover performance cannot be evaluated correctly without controlling for selection bias. Therefore the authors combined propensity score matching and a difference-in-difference methodology, checking for temporary unobservables.

The analysis finds that acquirers mainly targeted large less-capitalised banks with average efficiency and profitability. After takeover, the cost efficiency of the acquired banks improved thanks to a decreased reliance on deposits, which were apparently replaced by international funding. This did not result, unlike in the rest of central eastern European economies, in higher profitability or higher loan market shares. Overall, findings only tally piecemeal with the existing multi-country studies for transition economies.

The study focused on the Ukraine for a number of reasons - the benefits of a single-country study versus multi-country studies, reliable data and the fact that a significant share of the country's assets remain in domestic hands - but overall the authors believe the Ukrainian case provides unique lessons on foreign banks' performance in an institutionally adverse environment.