This book deals with the performance and strategies of banks in 12 Central and Eastern European economies in the transition phase. In order to gain deeper insights into the functioning of the CEE banking sectors a database with extensive financial statement and ownership information is set up. Based on the dataset, banking efficiency is measured with the help of a stochastic frontier analysis. Foreign banks are on average more cost efficient than their domestic counterparts. Among the domestic banks, state owned banks outperform privately owned banks.

In the second part of this book, the importance of good creditor rights as a determinant for banking performance is established. Improvements in legislation provide the bank with means to establish a secured interest when engaging in lending contracts. It is shown that lending conditions improve for banks once creditor rights legislation is reformed. The implications of the theoretical model are tested empirically. Applying a DID methodology yields that improvements in collateral and bankruptcy legislation, indeed, cause increases in banking efficiency.

Finally, the causes and consequences of foreign market penetration are examined. The high market share of foreign banks can theoretically be explained with a technological advantage compared to their domestic competitors. Implications about the banking strategies of foreign banks are obtained by examining the factors that determine loan supply. Interestingly, the loan supply functions of the domestic and foreign banks only differ slightly. Further, no relationship between the macroeconomic conditions in the country of origin and the lending activity of a foreign bank is detected. These results support the claim that foreign banks move into the CEE countries to develop a new market.