Banking Integration and Efficiency Convergence in Baltic Countries in Post-Crisis Period

Abstract

Abstract We investigate banking efficiency in Baltic countries over the period 2007 - 2011 during one of the biggest financial crisis. The global economic crisis began in December 2007 with the loss of investor confidence in the U.S. securitized mortgages that led to a liquidity crisis that prompted a substantial injection of capital into financial markets by the U.S. Federal Reserve, the Bank of England and European Central Bank. Baltic countries joined the EU in 2004, during the largest wave of accession. Estonia is a member of the eurozone since 2011, Latvia since 2014 and Lithuania adopted euro in 2015. We use Data Envelopment Analysis (DEA) - a nonparametric method in operations research and economics for the estimation of production frontiers. It is used to empirically measure productive efficiency of decision-making units (or DMUs) for a sample of banks in a highly concentrated banking system. The aim of the paper is to show the evolution of the banking efficiency in the Baltic countries over the period 2007 - 2011 by using Malmquist index. Our goal is to highlight the evolution of efficiency and we want to answer the research question “How banking efficiency evolved after the financial crisis?” Results show a slight improvement in banking efficiency over the period 2010 - 2011 due to improved management of the inputs, but further research is needed to gain a clearer picture of the phenomenon.