The Benefits of Privatizing Banks to Strategic Foreign Investors: A Survey of Central and Eastern Europe

The last decade witnessed the biggest privatization initiative so far that transitioned the markets of Central and Eastern Europe from centrally planned to competitive and western oriented. As a result, an increasing share of the banking sector in many of the transitional states is controlled by foreign capital. This study examines the effect of privatizing banks to foreign owners as opposed to domestic owners on bank performance. Using the ratio approach and the stochastic frontier approach, the paper concludes that although the effects of new ownership are not very pronounced due to the recent nature of the transition, banks privatized to foreign owners outperform these sold to domestic owners across all measures: profitability level, portfolio quality and managerial efficiency