To understand the transformation of banking in the post-communist transition, we examine the cost efficiency of 289 banks in 15 East European countries. We find that banking systems in which foreign-owned banks have a larger share of total assets have lower costs and that the association between a country’s progress in banking reform and cost efficiency is non-linear. Early stages of reform are associated with cost reductions, while costs tend to rise at more advanced stages. Private banks are more efficient than state-owned banks, but there are differences among private banks. Privatised banks with majority foreign ownership are the most efficient and those with domestic ownership are the least.

This paper explores how bank characteristics and the institutional environment influence the composition of banks’ loan portfolios. We use a new and unique data set based on the EBRD Banking Environment and Performance Survey (BEPS), which was conducted for 220 banks in 20 transition countries. We show that bank ownership, bank size, and legal creditor protection are important determinants of the composition of banks’ loan portfolios. In particular, we find that foreign banks play an active role in mortgage lending. Moreover, banks that perceive pledge and mortgage laws to be of high quality choose to focus more on mortgage lending.