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Prepared by Rudolfs Bems (EUR).
The excluded larger EMU markets are Germany, Italy, France, and Luxembourg. NMS include the Czech Republic, Hungary, Poland, the Slovak Republic, Estonia, Latvia, and Lithuania. Slovenia is excluded from both groups. Unless noted otherwise, these definitions of EMU and NMS are followed throughout the paper.
Measured by asset size, these banks constitute 60 percent of the Slovene banking sector.
Labor cost share and its trend for Slovenia in Bankscope data are very similar to what is reported in Bank of Slovenia (2006). The latter is based on the aggregated banking sector balance sheet for Slovenia.
The method builds on the assumption that all banks in the sample face a common production function. for further details on stochastic frontier analysis methodology, see Kumbhakar and Lovell (2000).
These definitions of regression variables are standard in the literature. The only notable deviation is the definition of the price of labor. General practice in the literature, due to lack of data on employment, has been to express it as personnel expenses over total assets. Although using data on employment meant a somewhat smaller number of observations, correlations between the price of labor expressed using the two methods were close to zero, and, therefore, the series with a more appealing economic interpretation was chosen.
With more than one output variable, the regression equation takes a translog form.
PR methodology assumes, among other things, that bank cost structure is homogenous and banks operate in a long-run equilibrium with exogenous input prices. For a more detailed discussion of underlying assumptions, see, e. g., Bikker and Haaf (2002). This paper tests for the presence of long-run equilibrium in each market with an approach previously used in the literature (see, e.g., Claessens and Laeven (2004). Results of the long-run equilibrium test are reported in Table 3.
Our baseline specification already includes the absolute size of assets as a control, since the price of bank output is expressed as the ratio of revenues to all earning assets.
In calculating the average index values and rankings, we have ignored long-run equilibrium test results. for Slovenia, existence of a long-run equilibrium was not rejected in any of the specifications.
See, e.g., Bikker and Haaf (2002), Gelos and Roldos (2002), Micco, Panizza, and Yanez (2004), and Claessens and Laeven (2004). Berger and others (2004) provide a detailed survey of the relevant literature.
Calculated as H = Σ(Sij · 100)2 , where sij represents total assets of bank i in country j as a share of country j total bank assets.
As a reference, further financial integration within EMU is estimated to add 1 percentage point to GDP growth over the next 10 years (Giannetti and others 2002).
See Chapter III on “Bank Risks from Cross-Border Lending and Borrowing in Slovenia.”