Benchmarking of the Banking Systems of the Countries ...internationalresearchjournaloffinanceandeconomics.com/ISSUES/IRJ… · methodologies: financial and econometric indicators

International Research Journal of Finance and Economics ISSN 1450-2887 Issue 174 July, 2019 http://www.internationalresearchjournaloffinanceandeconomics.com

Benchmarking of the Banking Systems of the Countries

Signatory of the Association Agreements with the

European Union

Lopotenco Viorica

Academy of Economic Studies of Moldova

Chișinău, Republic of Moldova

E-mail: [email protected] Tel: +373-794-05898

Abstract

The main objective of this study is to compare the efficiency of the banking systems

of the Eastern Partnership countries - the Republic of Moldova, Ukraine, and Georgia - and its impact on economic growth in these countries. The study analyzed the data from the central banks' reports of these three countries. Banking efficiency assessed through two methodologies: financial and econometric indicators that together allow for a complex picture for the benchmarking of the banking systems of the Eastern Partnership countries. Efficiency assessment through financial indicators included some parameters.

In order to assess the efficiency of banking systems, using the econometric methods, the intermediation approach, which looks at the bank as an intermediary of financial services, assumes that banks collect funds for deposits with labor and capital and converts them into loans and other assets. The efficiency of the banking system was determined using the DEA assessment method. This study concludes that the analysis highlighted the banking systems of the countries with the most significant problems in this respect. In the Ukrainian banking system and the Moldovan banking system, there are more severe deficiencies. On the other hand, Georgia, due to limited resources in the national economy, has focused on developing the banking sector on foreign investors and on attracting remittances in the banking sector and as a result and has achieved remarkable results in this respect.

Keywords: Eastern Partnership countries; financial system; efficiency of the financial system; financial indicators approach; econometric approach; DEA method.

JEL Classification: F4, G21 1. Introduction The Association Agreement is the main instrument of the European Union to bring the Eastern Partnership countries closer to European standards. When the Association Agreements with the European Union and the European Atomic Energy Community and their Member States sign on 27 June 2014, the Eastern Partnership countries have undertaken to adopt, within ten years, some 350 Union laws including several acts regulating financial services.

For the banking system in the Republic of Moldova, as well as for the banking systems of the other two countries of the Eastern Partnership - Ukraine and Georgia - the adaptation to the

International Research Journal of Finance and Economics - Issue 174 (2019) 9

requirements of the Union Europe market was a challenge, but especially a need to maintain a particular professional development standard, in order to be able to compete.

The financial systems of the signatory countries of the Association Agreement vary from one another due to their characteristics and potential. Financial strategies and policies developed concerning the general economic strategies of their countries, conditioned by a broad set of direct and indirect factors. In order to compare the financial systems of a whole set of countries, the benchmarking method can be used. The objectives of benchmarking are: to analyze how entities achieve their high performance; determining the necessary improvements; use of information to improve performance.

Banks in the three countries play a crucial role in ensuring financial intermediation between depositors and those in need of credit. For financial intermediation to have a positive impact on economic growth, it should be done efficiently.

This study focuses on the relationship between the efficiency of the banking systems of the Eastern Partnership countries and economic growth in the context of the implementation of Association Agreements.

The efficiency of the banking system is particularly crucial for the countries of Eastern Europe, where modern financial systems have been built near zero. It is because a banking system, which channels the resources available for productive use efficiently, is a powerful mechanism for economic growth. (Levine, 2005). Moreover, a well-functioning financial system usually reduces the difference between the upper and lower levels of income distribution in developing and emerging economies (Beck, 2008)

From this vision to assess the banking systems of the Republic of Moldova, Ukraine, and Georgia from their effectiveness perspective this study will benchmark the banking systems of these countries.

The article is organized as follows. The second section presents a review of the literature on the importance of the banking system in the financial intermediation process as well as the interdependence of the banking system's efficiency with the economic growth as well as the comparison of the efficiency of bank stems in different countries through several approaches. The third section of the document is devoted to describing the empirical methodology of the research. The data and variables used in the analysis are presented in Section Four. The results of applying the methodology to our data and their implications are analyzed in the fifth section. Finally, the conclusions are presented in Section Six. 1.1. Objectives

The purposes of this study are to (1) assess the efficiency of the Eastern Partner countries' banking systems through different approaches, and (2) determine the relationship between banking efficiency and growth. 2. Previous Research The functioning of financial systems can have a significant effect on economic growth. Efficient banking systems and securities markets ensure efficient fund transfers between depositors and investors, diversify household risk and generate information on potential investment and ongoing projects.

Lately, more and more evidence suggests that financial markets have a substantial effect on economic development (Demirgüç-Kunt and Levine, 2008). By linking investors with depositors, banks play a crucial role in allocating resources, diversifying risks and reducing information friction in credit markets. Limited access to credit for individuals and businesses prevents investment in human and physical capital, innovation and productivity growth. In addition to long-term economic growth, empirical evidence also shows that access to finance plays a vital role in shaping economic disparities

10 International Research Journal of Finance and Economics - Issue 174 (2019)

between individuals (Cihák, et al., 2012). Restrictions on access to finance reduce economic opportunities for those deprived of parental wealth, social status and political ties. Also, a well-functioning financial system usually reduces the gap between the lower and upper limits of income distribution in emerging and developing countries. 2.1. The Relationship between Financial Development and Economic Growth

The idea that the development of the financial sector is stimulating economic growth dates back to Smith (1776), which noted that "trade and industry ... have grown heavily" with the first banks established in Scotland and the fact that banks have contributed positively to this growth cannot be questioned. "Bagehot (1873) and Schumpeter (1912) also highlighted the positive correlation between financial development and economic activity, inspired by Goldsmith's (1969) a positive correlation between financial deepening and GDP per capita, as well as McKinnon (1973) and Shaw (1973), a large number of empirical studies (Allen and Gale, 2000; Demirguc-Kunt and Levine, 2001) investigated the relationship between financial development and economic development and hence economic growth. Most studies have positive and statistically significant effects of financial deepening on economic growth. (King and Levine, 2008)

However, some researches made after the global financial crisis have cast doubt on this view. Wachtel (2011) argues that "literature could have more emphasized the power of the relationship [economic growth] that is more nuanced than is often suggested." In particular, he stresses that "the most commonly used measure in the development of the sector, financial depth, is difficult to interpret, as it can be a reflection of the leverage effect on the economy as well as on the quality and quantity of intermediation." Also, other recent works have found nonlinearities in the relationship between financial deepening and economic growth. Jean-Louis Arkand et al. (2012) believes that the relationship between financing and growth becomes negative for high-income countries, and the cost of a private loan of 110% of GDP is about a turning point, and the negative relationship between financing and growth becomes significant about 150% of GDP.

Some high-income countries have reached such levels in 2000. According to this trend, "the level of financial development is good only up to one point, and then it becomes a hindrance to growth." Besides, it notes that "a rapidly growing financial sector is detrimental to productivity growth aggregates" in advanced economies (Cecchetti and Kharroubi, 2012)

Moreover, empirical evidence provides that financial growth affects disproportionately financial deepening and intensive research and development industries. The nonlinear view is also supported by recent IMF research, which notes that the effect of financial growth on economic growth is in the form of a bell: it weakens to higher levels of financial development. They attribute this weakening effect to an effective reduction in investment at high levels of financial development (Sahay et al., 2015)

Overall, there seems to be a new consensus that financial deepening may have significant positive effects to a certain point, but a certain level of financial development reduces financial deepening contributions. Also, it becomes more evident that the swollen financial system increases the risk and potential cost of the crisis. 2.2. Comparing the Efficiency of Banking Systems

Efficiency in the banking sector is a topic widely discussed in the literature, especially lately, in which competition on financial markets intensified. Substantial efforts have been made to improve the analysis of the world's financial systems by combining and updating multiple sets of financial data. Martin Čihák et al. (2012) attempted to answer a number of questions including how to compare financial systems in different countries and regions over time; how the various features of financial systems can be characterized empirically; how were the financial systems affected by the global financial crisis and what are the critical trends after the crisis? A separate compartment was dedicated


to comparing the efficiency of banking systems. Thus, according to these authors, efficiency is primarily intended to measure the cost of credit intermediation. Efficiency assessment includes indicators such as overhead costs to total assets, net interest margin, lending-deposits spread, non-interest income to total income, and cost to income ratio. Carefully related variables include measures such as return on assets and return on equity. While efficient financial institutions also tend to be more profitable, the relationship is not very close (for example, an inefficient financial system can post relatively high profitability if it operates in an economic upswing, while an otherwise efficient system hit by an adverse shock may generate losses). Čihák mentioned that these are relatively brute measures of efficiency. For a subset of countries, it would be good to calculate performance-based indices on data envelopment analysis and other more sophisticated measures.

A comparative analysis of banking performance becomes a topic of accessible research for the United States (Altunbaş et al., 2001), Japan (Altunbash et al., 2000), China (Berger et al., 2009) and for transnational efficiency analysis (Berger, Hancock, Humphrey, 1993, Berger et al., 2000, Dietsch, Lozano-Vivas, 2000, Berger, 2007) and others.

On the other hand, it would seem that there is a unique vision of efficiency since 1957 when British economist M. Farrell published the article "Measurement of Production Efficiency." However, according to Berger and Humphrey (1997), there is controversy over the efficiency benchmarking method. Therefore most of the efficiency studies were motivated by the desire to estimate the production function frontier and to measure economic efficiency by using parametric or non-parametric frontier methods (Murillo-Zamorano, 2004). Parametric methods involve the stochastic frontier of the production function, while non-parametric methods involve data coverage analysis. An econometric model, according to Arshinova, (2007) is called "parametric" if all parameters are infinite dimensional spaces; a model is "non-parametric" if all parameters are in infinite dimensional spaces. 3. Research Method The emphasis on the efficiency of the financial system is relevant for two reasons. Firstly, there has been a constant concern in terms of economic performance over the last period. The critical question is whether there may be something in the structure or functioning of the financial system that could explain why a developing country's economy, such as the Republic of Moldova, may be lower in performance than other advanced economies.

Secondly, the global financial crisis has highlighted the potential for financial system problems to determine broader economic instability. It also demonstrated how inefficiencies in the financial system could contribute to vulnerabilities and imbalances over time. In the US, for example, mortgage finance innovation seems to have led to a misallocation of resources and, in general, to risk assessment. Moreover, financial systems in many countries have increased significantly concerning the size of their economy, amplifying the negative effect when problems arise in the financial sector.

The scope of the analysis of the structure of the financial system and the assessment of its development is rather extensive, and therefore the structural aspects cannot just be broken into autonomous segments, which correspond to the existing institutional arrangements. Structural and development issues arise across the range of financial markets and intermediaries, including banking, insurance, securities markets, and non-banking brokerage. Thus, this analysis often requires consideration of some factors for which a well-adapted and standardized quantification is not available. Therefore, the challenge is to implement those broad and somewhat abstract concepts in a practical and practical assessment methodology.

The methodology starts with an appreciation of the actions that seek to assess the existing financial services provided (and available) to the national economy - in terms of scale, scale, coverage, cost, and quality - vis - à - vis the practice International. Such an assessment should help identify areas with the low systemic performance that can be further analyzed to diagnose underperformance over realistic goals. Benchmarking can, to some extent, be quantified, but in practice, quantification should be complemented with detailed and qualitative information. Therefore, the question that may arise in


the situation where the quality or quantity is insufficient is what caused this deficit? Deficiencies will often be attributed to a wide range of structural, institutional and policy factors.

The intense and growing competition in the financial services market creates the need for access to information that allows the assessment of commercial banks operating on this market. Such assessments are essential for both bank owners and customers who expect high-level financial profits. Several methods are used, to estimate the efficiency of banks which can be divided into two groups:

1) The financial indicators approach, which is traditional for assessing the results of banking activities;

2) The econometric approach, preferred mainly by the academic community. Unfortunately, so far, there is still no generally accepted methodology of bank efficiency

analysis. The simplest method, also considered traditional, used in banking practice, is the method of financial indicators, the analysis of the efficiency of banks by econometric methods monopolized recent literature because it is more complicated. 4. Data and Selection of Variables An essential aspect of our research is the choice of variables, the values of which are used in the analysis of efficiency because the choice of variables in econometric studies significantly affects the results. In the literature, there are researches presenting results that differ due to the selection of the variables (Hunter, and Timme, 1995; Favore and Pappi, 1995)

However, there are certain limits for the selection of variables due to the reliability of the data. For example, variables may show different information, although they carry the same label or the same information can be reported under different labels. On the other hand, the use of random variables runs counter to analysis and makes interpretation difficult for both parametric and non-parametric studies. That is why it is essential to justify the process of selecting viable.

In banking sector research, there is no single approach to the input and output variables that the bank or the banking sector should describe. The choice of variables is left to the researchers and, ultimately, depends on the understanding of how banks should ideally work.

In the recent analysis of banking efficiency, several approaches have been developed and used intensively: the production approach, the intermediation approach, the so-called modern approach. Some sources also show the operating approach. Table 1: Inputs and outputs used with different approaches

Approach Input Output

production labor, financial capital and physical capital the number of deposit, settlement and credit accounts intermediation depozits, labor and capital loans, investments operating interest expense and non-interest expenses interest income and non-interest income modern physical capital, uninsured deposits, insured

deposits, other borrowed funds liquid assets, securities, loans, other traded assets

Source: autor update on: Hughes, J. and Mester, L, 2013; Boďa, M. and Zimková, E. 2015

The efficient functioning of the banking system greatly determines the country's economic growth potential. In this context, in order to perform activities to improve the efficiency of the banking system, it is necessary to assess the current situation and to identify the existing problems. To better accomplish this, we will try to benchmark the banking systems of the signatory countries of the Association Agreements with the European Union through the non-parametric DEA method using the itermediation approach. The descriptive statistics of the variables used in assessing the effectiveness of the three countries are presented below.

International

Table 2:

Variabile

Total

depozit

Number of

employees

Fixed

assets

Total loans

Other

earning

assets

Source: the author

5. Empirical The efficient operation of economies where capital markets are not well developed, as is the case with the countries that are signatories to the Association Agreement. From Figure 1 we can see that in alassets of the banking system account for about 90% of the total assets of the financial system. Figure 1:

Source: Informa<http://www.bnm.md/bdi/pages/reports/drsb/DRSB1.xhtml?id=0&lang=ro<https://www.cnpf.md/storage/old_site_files/file/Publicatii/Raport_Anual_2017.pdf[online]<https://bank.gov.ua/control/en/publish/article;jsessionid=B437ECB9ECE2606704BC0E22F065C452?art_id=34705283&cat_id=34798612<https://www.nbg.gov.ge/index.php?m=304#monetarystatistics

International Research Journal of Finance and Economics

Descriptive statistics on variables used for efficiency measurement, mln. EUR

Year

1x

20172016201520142013

Number of

2x

20172016201520142013

3x

20172016201520142013

Total loans 1y

20172016201520142013

2y

20172016201520142013

Source: the author

Empirical Analysis The efficient operation of economies where capital markets are not well developed, as is the case with the countries that are signatories to the Association Agreement. From Figure 1 we can see that in alassets of the banking system account for about 90% of the total assets of the financial system.

The structure of the financial system in the signatory countries of the Association Agreements with the European Union

Source: Informație privind activitatea economicohttp://www.bnm.md/bdi/pages/reports/drsb/DRSB1.xhtml?id=0&lang=rohttps://www.cnpf.md/storage/old_site_files/file/Publicatii/Raport_Anual_2017.pdf

[online]. https://bank.gov.ua/control/en/publish/article;jsessionid=B437ECB9ECE2606704BC0E22F065C452?art_id=34705

283&cat_id=34798612https://www.nbg.gov.ge/index.php?m=304#monetarystatistics

Research Journal of Finance and Economics


Year Minimum

2017 449.32016 339.112015 255.592014 99.592013 90.462017 1122016 100.002015 92.002014 88.002013 86.002017 22.442016 23.612015 17.082014 20.262013 19.382017 348.02016 225.662015 186.92014 172.292013 155.212017 0.1002016 0.102015 0.102014 0.102013 0.10

Analysis and ResultsThe efficient operation of financial intermediation through the banking sector is essential in the case of economies where capital markets are not well developed, as is the case with the countries that are signatories to the Association Agreement. From Figure 1 we can see that in alassets of the banking system account for about 90% of the total assets of the financial system.

The structure of the financial system in the signatory countries of the Association Agreements with the European Union

ie privind activitatea economico

http://www.bnm.md/bdi/pages/reports/drsb/DRSB1.xhtml?id=0&lang=rohttps://www.cnpf.md/storage/old_site_files/file/Publicatii/Raport_Anual_2017.pdf

https://bank.gov.ua/control/en/publish/article;jsessionid=B437ECB9ECE2606704BC0E22F065C452?art_id=34705283&cat_id=34798612>; Financial Institution

https://www.nbg.gov.ge/index.php?m=304#monetarystatistics



Minimum

449.3 339.11 255.59 99.59 90.46 112

100.00 92.00 88.00 86.00 22.44 23.61 17.08 20.26 19.38 348.0 225.66 186.9 172.29 155.21 0.100 0.10 0.10 0.10 0.10

Results financial intermediation through the banking sector is essential in the case of

economies where capital markets are not well developed, as is the case with the countries that are signatories to the Association Agreement. From Figure 1 we can see that in alassets of the banking system account for about 90% of the total assets of the financial system.

The structure of the financial system in the signatory countries of the Association Agreements with

ie privind activitatea economico-financiarhttp://www.bnm.md/bdi/pages/reports/drsb/DRSB1.xhtml?id=0&lang=rohttps://www.cnpf.md/storage/old_site_files/file/Publicatii/Raport_Anual_2017.pdf

https://bank.gov.ua/control/en/publish/article;jsessionid=B437ECB9ECE2606704BC0E22F065C452?art_id=34705>; Financial Institutions




Median

2723.7 2683.73 2478.59 2656.77 2957.51

623 607.00 581.50 597.00 631.00 185.23 175.89 165.07 146.73 139.18 1602.6

1889.70 2315.73 2177.57 2658.04 74.598 46.42 28.68 27.57 60.24

financial intermediation through the banking sector is essential in the case of economies where capital markets are not well developed, as is the case with the countries that are signatories to the Association Agreement. From Figure 1 we can see that in alassets of the banking system account for about 90% of the total assets of the financial system.


financiară a băncilor din RM. http://www.bnm.md/bdi/pages/reports/drsb/DRSB1.xhtml?id=0&lang=rohttps://www.cnpf.md/storage/old_site_files/file/Publicatii/Raport_Anual_2017.pdf

https://bank.gov.ua/control/en/publish/article;jsessionid=B437ECB9ECE2606704BC0E22F065C452?art_id=34705s [online].


Research Journal of Finance and Economics - Issue 174 (2019)


Mean

9998.3 9162.04 8427.61 8919.39 7369.38

1312 1311.33 1270.17 1364.13 1457.73 433.87 433.70 363.81 331.69 296.45 5048.2

5355.12 6078.17 6991.42 5470.05 481.143 186.05 117.52 120.72 172.38



ncilor din RM. [online]

http://www.bnm.md/bdi/pages/reports/drsb/DRSB1.xhtml?id=0&lang=ro>;https://www.cnpf.md/storage/old_site_files/file/Publicatii/Raport_Anual_2017.pdf

https://bank.gov.ua/control/en/publish/article;jsessionid=B437ECB9ECE2606704BC0E22F065C452?art_id=34705

https://www.nbg.gov.ge/index.php?m=304#monetarystatistics>

Issue 174 (2019)


Maximum

59989.654972.2450565.6566895.4255270.35

787378687621

1023110933

2603.202602.202182.852487.672223.3830289.432130.7336469.0052435.6641025.362886.8581116.29705.14905.39

1292.87



[online]. ; Raport anual

https://www.cnpf.md/storage/old_site_files/file/Publicatii/Raport_Anual_2017.pdf>; Banking system indicators



Maximum Standard

Deviation

59989.6 16697.854972.24 15241.4950565.65 14076.8066895.42 16664.9955270.35 13702.32

7873 2145.057868 2139.107621 2067.00

10231 2515.3210933 2690.22

2603.20 727.302602.20 724.482182.85 595.782487.67 613.882223.38 548.3830289.4 8446.4832130.73 8942.0736469.00 10173.6752435.66 13324.8841025.36 10198.942886.858 874.101116.29 314.81705.14 205.33905.39 236.52

1292.87 331.21

financial intermediation through the banking sector is essential in the case of economies where capital markets are not well developed, as is the case with the countries that are signatories to the Association Agreement. From Figure 1 we can see that in all three countries the assets of the banking system account for about 90% of the total assets of the financial system.


[online]. Banking system indicators


13

Standard

Deviation

16697.8 15241.49 14076.80 16664.99 13702.32 2145.05 2139.10 2067.00 2515.32 2690.22 727.30 724.48 595.78 613.88 548.38

8446.48 8942.07 10173.67 13324.88 10198.94 874.10 314.81 205.33 236.52 331.21

financial intermediation through the banking sector is essential in the case of economies where capital markets are not well developed, as is the case with the countries that are

l three countries the


Banking system indicators


14

GDP but also in comparison with the income and wealth of the population as well as otintermediation.( Lazea, V, 2017)

while maintaining low capital costs. Eficient allocation of available funds in the banking sector to be usby the real economy at a low cost thus has an effect of stimulating sustainable economic growth.

surplus financing and provide them in the form of loans to agentthey offer financial products, such as loans, deposits, and placements. The evolution of the level of financial intermediation can be presented through two indicators: the degree of monetization of the economy represen Figure 2:

the Republic of Moldova and Ukraine and a reverse situation in Georgia. 5.1. Comparison of the

Indicators

Implementation of the Associatiservices. The table above provides a series of indicators through which we can see how affordable financial services are in the Eastern Partnership countries.

financial services support economic growth and reduce poverty and inequality. Financial development allows for more significant investments and more productive capital allocations, which therefore lead to higher revenue growth.

14

In fact, the size of the European banking sector is considered oversized not only in terms of GDP but also in comparison with the income and wealth of the population as well as otintermediation.( Lazea, V, 2017)

In this case, the banking sector plays a significant role in providing investment and commerce funds while maintaining low capital costs. Eficient allocation of available funds in the banking sector to be usby the real economy at a low cost thus has an effect of stimulating sustainable economic growth.

Banks in their role of financial intermediation collect resources from economic agents with surplus financing and provide them in the form of loans to agentthey offer financial products, such as loans, deposits, and placements. The evolution of the level of financial intermediation can be presented through two indicators: the degree of monetization of the economy represen

Figure 2: Financial intermediation in the countries that are signatories to the Association Agreements with the European Union

From the graphs above, one can notice a tendencythe Republic of Moldova and Ukraine and a reverse situation in Georgia.

5.1. Comparison of the

Indicators


These indicators, show us the levelfinancial services support economic growth and reduce poverty and inequality. Financial development allows for more significant investments and more productive capital allocations, which therefore lead o higher revenue growth.



Banks in their role of financial intermediation collect resources from economic agents with surplus financing and provide them in the form of loans to agentthey offer financial products, such as loans, deposits, and placements. The evolution of the level of financial intermediation can be presented through two indicators: the degree of monetization of the economy represented by the M2/GDP ratio and the share of private sector credit in GDP.

Financial intermediation in the countries that are signatories to the Association Agreements with the European Union


5.1. Comparison of the Banking






Banks in their role of financial intermediation collect resources from economic agents with surplus financing and provide them in the form of loans to agentthey offer financial products, such as loans, deposits, and placements. The evolution of the level of financial intermediation can be presented through two indicators: the degree of monetization of the

ted by the M2/GDP ratio and the share of private sector credit in GDP.

Financial intermediation in the countries that are signatories to the Association Agreements with the European Union


Banking Systems

Implementation of the Association Agreement should mean access to safe and quality financial services. The table above provides a series of indicators through which we can see how affordable financial services are in the Eastern Partnership countries.



In fact, the size of the European banking sector is considered oversized not only in terms of GDP but also in comparison with the income and wealth of the population as well as ot




Financial intermediation in the countries that are signatories to the Association Agreements with the


Systems of the Eastern Partnership

on Agreement should mean access to safe and quality financial services. The table above provides a series of indicators through which we can see how affordable financial services are in the Eastern Partnership countries.

These indicators, show us the level of financial deepening. More diverse and affordable financial services support economic growth and reduce poverty and inequality. Financial development allows for more significant investments and more productive capital allocations, which therefore lead







From the graphs above, one can notice a tendency of decreasing the degree of intermediation in the Republic of Moldova and Ukraine and a reverse situation in Georgia.

of the Eastern Partnership

on Agreement should mean access to safe and quality financial services. The table above provides a series of indicators through which we can see how affordable financial services are in the Eastern Partnership countries.

of financial deepening. More diverse and affordable financial services support economic growth and reduce poverty and inequality. Financial development allows for more significant investments and more productive capital allocations, which therefore lead




Banks in their role of financial intermediation collect resources from economic agents with surplus financing and provide them in the form of loans to agents who need financing (deficit). Thus, they offer financial products, such as loans, deposits, and placements. The evolution of the level of financial intermediation can be presented through two indicators: the degree of monetization of the



of decreasing the degree of intermediation in the Republic of Moldova and Ukraine and a reverse situation in Georgia.

of the Eastern Partnership Countries

on Agreement should mean access to safe and quality financial services. The table above provides a series of indicators through which we can see how affordable





Banks in their role of financial intermediation collect resources from economic agents with s who need financing (deficit). Thus,

they offer financial products, such as loans, deposits, and placements. The evolution of the level of financial intermediation can be presented through two indicators: the degree of monetization of the



of decreasing the degree of intermediation in

Countries through



International Research Journal of Finance and Economics - Issue 174 (2019)

In fact, the size of the European banking sector is considered oversized not only in terms of GDP but also in comparison with the income and wealth of the population as well as other sources of







through Financial



Issue 174 (2019)

In fact, the size of the European banking sector is considered oversized not only in terms of her sources of

In this case, the banking sector plays a significant role in providing investment and commerce funds while maintaining low capital costs. Eficient allocation of available funds in the banking sector to be used





Financial




Table 3: Access and use the financial services in the countries which are signatories to the Association Agreements with the European Union

Indicators Republic of

Moldova Ukraine Georgia

Branches of commercial banks per 1,000 km2 24.49 0.30 14.35 Branches of commercial banks per 100,000 adults 26.91 0.45 33.19 ATMs per 1,000 km2 33.43 63.88 32.82 ATMs per 100,000 adults 36.74 97.67 75.93 Outstanding deposits withs commercial banks (% GDP) 39.83 28.41 41.25 Outstanding withs commercial banks (% GDP) 22.26 33.66 57.74 Deposit accounts with banks per 1,000 adults 1351.30 3029.57 2080.21 Loan accounts withs commercial banks per 1,000 adults 70.97 976.82 1248.74 Depositors withs commercial banks: o/w households per 1,000 adults 1147.27 2969,79 1983.90 Loan accounts withs commercial banks: households households per 1,000 adults 66.41 2854.08 1240.52 Outstanding deposits withs commercial banks: households (% GDP) 25.38 16.88 21.32 Loan accounts withs commercial banks: households (% GDP) 5.22 5.86 29.12

Source: Financial Access Survey [online]. < http://data.imf.org/?sk=E5DCAB7E-A5CA-4892-A6EA-598B5463A34C>

The indicators of access to and use of financial services indicate an advance of Georgia compared to the other two countries.

One of the indicators or signs (but not the only one) of economic development and prosperity is the development and growth of the private sector's share (role) in the national economy or in the country's GDP. According to World Bank reports, the domestic credit provided by the financial sector includes all loans for various sectors on a gross basis, except for loans to the government, which is net. Financial resources, credit and securities, which are not equity, are granted to the private sector by financial institutions, such as banks and other financial corporations, all measured as percentages of GDP (or national economy size).

The higher the value of this indicator, the greater the private sector financing in a country, and thus the opportunities and the space for the private sector to grow and grow. The greater the role of the private sector in the national economy, the better the health and development of the country's economy is.

To illustrate this interdependence we will present examples of World Bank statistics, in China in 2017, the domestic credit ratio of the private sector to GDP recorded a rate of 155.8%. This explains why China has achieved a high economic growth of 6.9%, because it has given space and opportunities for the private sector to get financing. Another example in 2017, Japan, Denmark, and Korea recorded the following values of this indicator - 168.19, 165.42% and 144.8%, respectively, which attested to developed and advanced economies, where private companies have great access to finance.

In contrast, developing countries such as Argentina in Latin America and Nigeria in Africa have this ratio of 16.12% and 14.2%, respectively (although rich in minerals and natural resources, such as oil , metals and agricultural products), which means that the private sector in these countries has a smaller role. (these countries in one way or another have military regimes with government domination). In general, this is an indicator or measure of the degree of economic and successful development (but not the only one) because it demonstrates the capacity of the private sector that works hand in hand with the public or government sector.

16

Source:

Agreement with the European Union on 27 June 2014, we can see an alarming signal both in the Republic of Moldova and in Ukraine, where it is continuously falling. In Georgia, the share of domestic credit to the private

result of the consequences of the banking crisis in 2014 and Ukraine as a result of the tensions in the east of theHowever, in 2017 the situation in the Republic of Moldova has improved slightly, registering a small increase, and the negative trend in Ukraine slowed down.

loans, the rate of nonmore) to total gross loans (total loan portfolio). The amount of theincludes the gross amount of the loan recorded in the balance sheet, not just the outstanding amount.

commonly accepted method of determiningdifferent methodologies and standards, as many central banks have adopted rigorous policies and severe provisioning to minimize system risk. Therefore, comparing this indicator in many situationcan be controversial. The figure below shows the trend of this indicator in the banking systems of the three countries.

Source:

16

Source: The World Bank Data

If we look at the evolution of this indicator in the Agreement with the European Union on 27 June 2014, we can see an alarming signal both in the Republic of Moldova and in Ukraine, where it is continuously falling. In Georgia, the share of domestic credit to the private

The unfavorable evolution of this indicator until 2016 in the Republic of Moldova may be the result of the consequences of the banking crisis in 2014 and Ukraine as a result of the tensions in the east of the country, which have an impact both on the national economy and on the banking system. However, in 2017 the situation in the Republic of Moldova has improved slightly, registering a small increase, and the negative trend in Ukraine slowed down.

Another loans, the rate of nonmore) to total gross loans (total loan portfolio). The amount of theincludes the gross amount of the loan recorded in the balance sheet, not just the outstanding amount.

However, the problem of determining NPLs is a very complex one because there is no commonly accepted method of determiningdifferent methodologies and standards, as many central banks have adopted rigorous policies and severe provisioning to minimize system risk. Therefore, comparing this indicator in many situationcan be controversial. The figure below shows the trend of this indicator in the banking systems of the three countries.


The World Bank Data

If we look at the evolution of this indicator in the Agreement with the European Union on 27 June 2014, we can see an alarming signal both in the Republic of Moldova and in Ukraine, where it is continuously falling. In Georgia, the share of domestic credit to the private

The unfavorable evolution of this indicator until 2016 in the Republic of Moldova may be the result of the consequences of the banking crisis in 2014 and Ukraine as a result of the tensions in the

country, which have an impact both on the national economy and on the banking system. However, in 2017 the situation in the Republic of Moldova has improved slightly, registering a small increase, and the negative trend in Ukraine slowed down.

Another benchmark for assessing bank efficiency in terms of risk factors is the ratio of default loans, the rate of non-performing loans (interest and interest payments remaining after 90 days or more) to total gross loans (total loan portfolio). The amount of theincludes the gross amount of the loan recorded in the balance sheet, not just the outstanding amount.

However, the problem of determining NPLs is a very complex one because there is no commonly accepted method of determiningdifferent methodologies and standards, as many central banks have adopted rigorous policies and severe provisioning to minimize system risk. Therefore, comparing this indicator in many situationcan be controversial. The figure below shows the trend of this indicator in the banking systems of the three countries.

Figure 4

The World Bank Data


Figure 3: Domestic cred

[online]. < https://data.worldbank.org/indicator/fs.ast.prvt.gd.zs

If we look at the evolution of this indicator in the Agreement with the European Union on 27 June 2014, we can see an alarming signal both in the Republic of Moldova and in Ukraine, where it is continuously falling. In Georgia, the share of domestic credit to the private sector relative to GDP is steadily increasing.


country, which have an impact both on the national economy and on the banking system. However, in 2017 the situation in the Republic of Moldova has improved slightly, registering a small increase, and the negative trend in Ukraine slowed down.

benchmark for assessing bank efficiency in terms of risk factors is the ratio of default performing loans (interest and interest payments remaining after 90 days or

more) to total gross loans (total loan portfolio). The amount of theincludes the gross amount of the loan recorded in the balance sheet, not just the outstanding amount.

However, the problem of determining NPLs is a very complex one because there is no commonly accepted method of determiningdifferent methodologies and standards, as many central banks have adopted rigorous policies and severe provisioning to minimize system risk. Therefore, comparing this indicator in many situationcan be controversial. The figure below shows the trend of this indicator in the banking systems of the

Figure 4: Bank nonperforming loans to total gross loans, (%)



Domestic credit to private sector (% of GDP)

https://data.worldbank.org/indicator/fs.ast.prvt.gd.zs

If we look at the evolution of this indicator in the Agreement with the European Union on 27 June 2014, we can see an alarming signal both in the Republic of Moldova and in Ukraine, where it is continuously falling. In Georgia, the share of

sector relative to GDP is steadily increasing.The unfavorable evolution of this indicator until 2016 in the Republic of Moldova may be the

result of the consequences of the banking crisis in 2014 and Ukraine as a result of the tensions in the country, which have an impact both on the national economy and on the banking system.

However, in 2017 the situation in the Republic of Moldova has improved slightly, registering a small increase, and the negative trend in Ukraine slowed down.



However, the problem of determining NPLs is a very complex one because there is no commonly accepted method of determining the NPLs indicator. The issue is to reflect asset quality in different methodologies and standards, as many central banks have adopted rigorous policies and severe provisioning to minimize system risk. Therefore, comparing this indicator in many situationcan be controversial. The figure below shows the trend of this indicator in the banking systems of the

Bank nonperforming loans to total gross loans, (%)



it to private sector (% of GDP)


If we look at the evolution of this indicator in the Agreement with the European Union on 27 June 2014, we can see an alarming signal both in the Republic of Moldova and in Ukraine, where it is continuously falling. In Georgia, the share of



However, in 2017 the situation in the Republic of Moldova has improved slightly, registering a small increase, and the negative trend in Ukraine slowed down.



However, the problem of determining NPLs is a very complex one because there is no the NPLs indicator. The issue is to reflect asset quality in

different methodologies and standards, as many central banks have adopted rigorous policies and severe provisioning to minimize system risk. Therefore, comparing this indicator in many situationcan be controversial. The figure below shows the trend of this indicator in the banking systems of the






If we look at the evolution of this indicator in the countries that signed the Association Agreement with the European Union on 27 June 2014, we can see an alarming signal both in the Republic of Moldova and in Ukraine, where it is continuously falling. In Georgia, the share of



However, in 2017 the situation in the Republic of Moldova has improved slightly, registering a small


more) to total gross loans (total loan portfolio). The amount of the loan recorded as nonperforming includes the gross amount of the loan recorded in the balance sheet, not just the outstanding amount.







https://data.worldbank.org/indicator/fs.ast.prvt.gd.zs>

countries that signed the Association Agreement with the European Union on 27 June 2014, we can see an alarming signal both in the Republic of Moldova and in Ukraine, where it is continuously falling. In Georgia, the share of

sector relative to GDP is steadily increasing. The unfavorable evolution of this indicator until 2016 in the Republic of Moldova may be the


However, in 2017 the situation in the Republic of Moldova has improved slightly, registering a small


loan recorded as nonperforming includes the gross amount of the loan recorded in the balance sheet, not just the outstanding amount.








country, which have an impact both on the national economy and on the banking system. However, in 2017 the situation in the Republic of Moldova has improved slightly, registering a small





Issue 174 (2019)



country, which have an impact both on the national economy and on the banking system. However, in 2017 the situation in the Republic of Moldova has improved slightly, registering a small




different methodologies and standards, as many central banks have adopted rigorous policies and severe provisioning to minimize system risk. Therefore, comparing this indicator in many situations can be controversial. The figure below shows the trend of this indicator in the banking systems of the

International

The most favorable situation, based on the above data, is in Georgia, with a decrease in this indicator. In the Republic of Moldova and especially in Ukraine the situation is somewhat alarming as a result of the continuous growth of this indicator.

So the interest rate spread is an indicator that can be interpreted as one of the efficiencies of the banking system.

The interest rate spread is the interest rate applied by banks to loans to private sectminus the interest rate paid by commercial banks or similar deposits. The terms and conditions attached to these rates vary from one country to another, limiting their comparability

A high level of this indicator hinders the development of fininternal sources of investment. This is because potential investors hold a low(saving holders), as well as highassets to finance innocompetitiveness and growth potential.


From the above figure, it can be seen that Ukraine is the country with the largest spread. However, it should be noted that during t7.26%. In the Republic of Moldova, the spread in 2017 reached 4.59%, increasing by 0.99% compared to 2016. In Georgia, this indicator shows a decreasing trend, and in 2016 it was 1.83%

The conceptcriteria, both the financial results of its activity as well as its performance as well as the total financial indicators obtained in a certain period can be taken into acperformance studies focus on financial ratios (such as ROA and ROE), but also econometric methods.

To begin with, we will briefly analyze the financial ratios of the banking systems of the signatory countries o

The indicators of the efficiency of the banking system in the Republic of Moldova calculated based on 11 banks indicate an increase in productivity (in 2017 after a peribanking system in banking efficiency was established in 2007 (ROA


The most favorable situation, based on the above data, is in Georgia, with a decrease in this indicator. In the Republic of Moldova and especially in Ukraine the situation is somewhat alarming as

result of the continuous growth of this indicator.So the interest rate spread is an indicator that can be interpreted as one of the efficiencies of the

banking system. The interest rate spread is the interest rate applied by banks to loans to private sect

minus the interest rate paid by commercial banks or similar deposits. The terms and conditions attached to these rates vary from one country to another, limiting their comparability

A high level of this indicator hinders the development of fininternal sources of investment. This is because potential investors hold a low(saving holders), as well as highassets to finance innocompetitiveness and growth potential.

The World Bank Data


The concept of efficiency of the banking system is a multicriteria, both the financial results of its activity as well as its performance as well as the total financial indicators obtained in a certain period can be taken into acperformance studies focus on financial ratios (such as ROA and ROE), but also econometric methods.

To begin with, we will briefly analyze the financial ratios of the banking systems of the signatory countries of the Association Agreements with the European Union.

The indicators of the efficiency of the banking system in the Republic of Moldova calculated based on 11 banks indicate an increase in productivity (in 2017 after a period of decrease of this indicator, which lasted from 2008. (the record of the Moldovan banking system in banking efficiency was established in 2007 (ROA





A high level of this indicator hinders the development of fininternal sources of investment. This is because potential investors hold a low(saving holders), as well as high-assets to finance innovative projects and limits investment projects adverse effects on external competitiveness and growth potential.

The World Bank Data [online] < https://data.worldbank.org/indicator/fs.ast.prvt.gd.zs


of efficiency of the banking system is a multicriteria, both the financial results of its activity as well as its performance as well as the total financial indicators obtained in a certain period can be taken into acperformance studies focus on financial ratios (such as ROA and ROE), but also econometric methods.

To begin with, we will briefly analyze the financial ratios of the banking systems of the f the Association Agreements with the European Union.

The indicators of the efficiency of the banking system in the Republic of Moldova calculated based on 11 banks indicate an increase in productivity (in 2017

od of decrease of this indicator, which lasted from 2008. (the record of the Moldovan banking system in banking efficiency was established in 2007 (ROA





A high level of this indicator hinders the development of fininternal sources of investment. This is because potential investors hold a low

-interest rates on loans, which makes economic agents more liquid vative projects and limits investment projects adverse effects on external

competitiveness and growth potential.

Figure 5: Interest rate spread, (%)


From the above figure, it can be seen that Ukraine is the country with the largest spread. However, it should be noted that during the last two years this indicator has decreased from 8.8% to 7.26%. In the Republic of Moldova, the spread in 2017 reached 4.59%, increasing by 0.99% compared to 2016. In Georgia, this indicator shows a decreasing trend, and in 2016 it was 1.83%

of efficiency of the banking system is a multicriteria, both the financial results of its activity as well as its performance as well as the total financial indicators obtained in a certain period can be taken into acperformance studies focus on financial ratios (such as ROA and ROE), but also econometric methods.






result of the continuous growth of this indicator. So the interest rate spread is an indicator that can be interpreted as one of the efficiencies of the



interest rates on loans, which makes economic agents more liquid vative projects and limits investment projects adverse effects on external

Interest rate spread, (%)


From the above figure, it can be seen that Ukraine is the country with the largest spread. he last two years this indicator has decreased from 8.8% to

7.26%. In the Republic of Moldova, the spread in 2017 reached 4.59%, increasing by 0.99% compared to 2016. In Georgia, this indicator shows a decreasing trend, and in 2016 it was 1.83%

of efficiency of the banking system is a multicriteria, both the financial results of its activity as well as its performance as well as the total financial indicators obtained in a certain period can be taken into account. Generally, most previous business bank performance studies focus on financial ratios (such as ROA and ROE), but also econometric methods.






So the interest rate spread is an indicator that can be interpreted as one of the efficiencies of the




Interest rate spread, (%)




of efficiency of the banking system is a multi-configuration one, and as efficiency criteria, both the financial results of its activity as well as its performance as well as the total financial

count. Generally, most previous business bank performance studies focus on financial ratios (such as ROA and ROE), but also econometric methods.


The indicators of the efficiency of the banking system in the Republic of Moldova calculated based on 11 banks indicate an increase in productivity (in 2017 - ROA (1.91%) and ROE (11.42%)),

od of decrease of this indicator, which lasted from 2008. (the record of the Moldovan banking system in banking efficiency was established in 2007 (ROA-3.91% and ROE

Issue 174 (2019)




A high level of this indicator hinders the development of financial intermediation, limits internal sources of investment. This is because potential investors hold a low-interest rate on deposits





configuration one, and as efficiency criteria, both the financial results of its activity as well as its performance as well as the total financial



The indicators of the efficiency of the banking system in the Republic of Moldova calculated ROA (1.91%) and ROE (11.42%)),

od of decrease of this indicator, which lasted from 2008. (the record of the Moldovan 3.91% and ROE



The interest rate spread is the interest rate applied by banks to loans to private sector customers minus the interest rate paid by commercial banks or similar deposits. The terms and conditions attached to these rates vary from one country to another, limiting their comparability

ancial intermediation, limits interest rate on deposits






To begin with, we will briefly analyze the financial ratios of the banking systems of the


od of decrease of this indicator, which lasted from 2008. (the record of the Moldovan 3.91% and ROE-23.97%)

17



or customers minus the interest rate paid by commercial banks or similar deposits. The terms and conditions

ancial intermediation, limits interest rate on deposits



7.26%. In the Republic of Moldova, the spread in 2017 reached 4.59%, increasing by 0.99% compared



To begin with, we will briefly analyze the financial ratios of the banking systems of the


od of decrease of this indicator, which lasted from 2008. (the record of the Moldovan 23.97%)


Figure 6: Banks Profitability Indicators in the Republic of Moldova, (%)

Source: Informație privind activitatea economico-financiară a băncilor din RM. [online].

<http://www.bnm.md/bdi/pages/reports/drsb/DRSB1.xhtml?id=0&lang=ro>;

The obtained results indicated that during the studied period, there was a directly proportional relationship between the evolution of the efficiency index (the right scale) and the ROE and ROA rates. The relatively low profitability in the Moldovan banking system was mainly due to the reduction of credit (with direct consequences on the decrease in interest income) and the tightening of supervisory requirements.

Figure 7: Banks Profitability Indicators in the Georgia, (%)

Source: Financial Sector Review [online]. <https://www.nbg.gov.ge/uploads/publications/analytical_reports/2019/financial_sector_review_2019_feb_eng.pdf >

In Georgia in 2017 ROA and ROE accounted for 2.8% and 20.7% respectively. These values exceeded those of previous years. The profitability rate of the Georgian banking system has remained stable in recent years and has, in total, reached the required profitability for shareholders. The profitability of the banking system has been positively influenced by asset growth, further efficiency gains due to scale economies and improved asset quality. The increase in efficiency was reflected both in the cost-income ratio, which amounted to 47.1% and in the decrease of the operational cost in the average asset ratio from 3.56% to 3.44% compared to the previous year, and in the efficiency index, which reached almost 350% (the right scale). Besides, the return on liquid assets increased as a result of the increase in interest income from interbank accounts and deposits, certificates of deposits and the higher yield of treasury bills. It is also worth noting that the interest rate declined in 2017. On the other hand, there was an insufficient increase in non-interest income compared to assets. These models indicate an increase in competition in the financial sector in Georgia.

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2013 2014 2015 2016 2017

ROA ROE Ief

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ROA ROE Ief


Figure 8: Banks Profitability Indicators in the Ukraine, (%)

Source: Banking system indicators [online]. <https://bank.gov.ua/control/en/publish/article;jsessionid=B437ECB9ECE2606704BC0E22F065C452?art_id=34705283&c

at_id=34798612>

From the above figure, it can be noticed that in the last period there were significant deficiencies in the Ukrainian banking system, ROA and ROE indicators recording alarming values. The climax was 2016 when ROA and ROE recorded the following values: -12.6% and -116.74%, respectively. Paradoxically, but at the same time, the efficiency index of the Ukrainian banking sector (right scale) was quite high, exceeding its values in the Moldovan banking system. However, it should be noted that in 2017 ROA and ROE started to have a growing trend. Thus, the financial result of the sector continues to improve in the current period. This is facilitated by high operating revenues and a significant reduction in reserve allocations. Bank net interest income increases rapidly due to a substantial decrease in funding costs, and net commission income rises due to a rebound in demand for banking services 5.1. Applying the DEA Method to Evaluate the Banking Systems

The econometric approach is based on the notion of efficiency frontier. The efficiency of a bank or the banking sector is calculated on the basis the proximity of the values of the indicators of a particular bank or the entire sector (e.g., costs, the volume of services provided, etc.) at the potential or actual efficiency frontier. The efficiency frontier, in turn, is calculated based on the production function. Within the econometric approach, parametric and non-parametric methods develop in parallel, each with both advantages and disadvantages. Efficiency in the econometric approach is defined as the ratio between outputs and inputs, and we can describe it as a distance between the input and output quantity.

The DEA method is based on building an efficiency frontier, which is analogous to the production function if the output is not a scalar, but a vector one. The efficiency frontier has the shape of a convex cavity or a convex cone in the space of the input and output variables. The frontier is used as a reference for obtaining the numerical value of the effectiveness of each of the assessed banks. However, it should be noted that the DEA method only allows assessment of the relative efficiency of banks, i.e., their effectiveness compared to others. The degree of efficiency of banks is determined by their proximity to the efficiency limit in the multidimensional space of inputs/outputs.

So every DEA's sensitive and interpretable application is based on the explicit assumption of a production boundary that delimits the set of disposable inputs and achievable outputs. The R (R Core Team, 2018) program, as well as the DEAFrontier Software, was used to build the efficiency frontier.

The table below shows the values of operational efficiency, allocation efficiency and technical efficiency achieved over the years 2013-2017, as well as the costs of their implementation.

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Table 4: Results of the application of the DEA model, the intermediation approach

Year OE.cost TE.cost Revealed.cost OE AE TE

Republic of

Moldova

2017 12116.88 13022.74 19710.82 0.6147325 0.9304399 0.6606902 2016 11588.46 12839.90 18877.86 0.613865 0.9025354 0.6801561 2015 13447.00 14910.06 18147.32 0.7409909 0.9018743 0.8216121 2014 21714.88 24580.24 25223.93 0.8608844 0.8834285 0.974481 2013 15443.58 21482.04 26609.85 0.5803706 0.7189062 0.8072966

Ukraine

2017 291658.21 291658.21 291658.21 1.0000000 1.0000000 1.0000000 2016 300229.45 300229.45 300229.45 1.0000000 1.0000000 1.0000000 2015 320389.88 320389.88 320389.88 1.0000000 1.0000000 1.0000000 2014 421540.96 421540.96 421540.96 1.0000000 1.0000000 1.0000000 2013 563491.79 563491.79 563491.79 1.0000000 1.0000000 1.0000000

Georgia

2017 58848.81 58848.81 58848.81 1.0000000 1.0000000 1.0000000 2016 48260.98 48260.98 48260.98 1.0000000 1.0000000 1.0000000 2015 48466.01 48466.01 48466.01 1.0000000 1.0000000 1.0000000 2014 48667.13 48667.13 48667.13 1.0000000 1.0000000 1.0000000 2013 37817.23 39348.47 46188.69 0.8187553 0.9610852 0.8519071

Source: the author

The evolution of the efficiency of banking systems in the signatory countries of the Association Agreements with the European Union can be seen in the figure below.

From Figure 9, but also the data of Table 4, it can be noted that the technical efficiency, allocative efficiency and operational efficiency of the banking systems of the analyzed countries, calculated using the non-parametric method using exit oriented VRS, places Ukraine and Georgia in the front of Republic of Moldova. Efficiency in the econometric approach is calculated as the ratio between outputs and inputs and can be seen as a distance between the input and output quantity. Determining the efficiency of the banking systems of the analyzed countries was achieved through the intermediary approach, which emphasizes the role of the banking system in transforming the borrowed funds from the holders of deposits into granted loans. Perhaps the results would have been different if another approach had been applied. The intermediation approach was chosen because its dominant perspective is macroeconomic, which is essential for the comparison of banking systems in different countries. Figure 9: Output-Oriented, VRS Efficiency of the banking systems of the Republic of Moldova, Georgia and

Ukraine

Source: the author

For the benchmarking of the Eastern Partner countries' banking systems, the input-oriented CRS efficiency analysis and the slack performance analysis in DEAFrontier Software were also performed. One aspect to be emphasized is that by applying DEAFrontier Software the reference set for each inefficient unit can be built. We recall that each inefficient unit can be theoretically projected

International

at the efficient border and thus obtain an efficiency score equal to one. After using the CRS efficiency, input-oriented ooutput-oriented VRS.

From obtained results, is highlighted a contradiction: on the one hand inferior results of the efficiency of the Ukrainian banking system, following ton the other hand, outstanding results obtained through the noncontext, it is necessary to highlight that the financial indicators are absolute values, while the efficiency measures collected through the DEA are relative values. Figure 10:

Source: the author

These results show only if banks transfer their inputs into effects in an optimal way and if they have total reserves indicators, the profitability of the banking system parametric approach, the efficiency of the transformation of borrowed funds from the holders of deposits into loans was determined. From this point of view, the Moldovan banking system has the most significantshortcomings in the intermediation process, but also the excess liquidity in the banking system, recorded for a long time. 6. Summary and Concluding RemarksOf course, the implementation of the Association Agreement in the banking systems in the three countries, but still, reflect some general trends that also have an impact on economic growth

From the evolution of GDP, we can see that the efficiency of banking systems affects economic growth. Georgia is recording the best values of bank efficiency indicators and as a result economic growth, on the opposite side is placed Ukraine.

In finally, we cgrowth of countries and improves the quality of citizens' lives. A high degree of financial efficiency, where resources are allocated efficiently from depositors to investors, adistributions, regularly contributes to the quality of the financial system.

The efficiency of the banking system can have an essential influence on the economic performance of a country and can be influenced by a wide rangethe banking system. At the same time, the efficiency of the banking system is a complex economic


at the efficient border and thus obtain an efficiency score equal to one. After using the CRS efficiency, oriented or score

oriented VRS. From obtained results, is highlighted a contradiction: on the one hand inferior results of the

efficiency of the Ukrainian banking system, following ton the other hand, outstanding results obtained through the noncontext, it is necessary to highlight that the financial indicators are absolute values, while the efficiency

sures collected through the DEA are relative values.

Input-Oriented, CRSUkraine

Source: the author

These results show only if banks transfer their inputs into effects in an optimal way and if they have total reserves - and thus can get better outcomes using intentional inputs. In the case of financial indicators, the profitability of the banking system parametric approach, the efficiency of the transformation of borrowed funds from the holders of deposits into loans was determined. From this point of view, the Moldovan banking system has the most significant problems. The financial indicators of the Moldovan banking system also indicate shortcomings in the intermediation process, but also the excess liquidity in the banking system, recorded for a long time.

Summary and Concluding RemarksOf course, the indicators presented do not allow for a detailed analysis of the results of the implementation of the Association Agreement in the banking systems in the three countries, but still, reflect some general trends that also have an impact on economic growth

om the evolution of GDP, we can see that the efficiency of banking systems affects economic growth. Georgia is recording the best values of bank efficiency indicators and as a result economic growth, on the opposite side is placed Ukraine.

In finally, we cgrowth of countries and improves the quality of citizens' lives. A high degree of financial efficiency, where resources are allocated efficiently from depositors to investors, adistributions, regularly contributes to the quality of the financial system.



at the efficient border and thus obtain an efficiency score equal to one. After using the CRS efficiency, r score-based (Figure 10), can be noticed almost identical to the scores obtained by

From obtained results, is highlighted a contradiction: on the one hand inferior results of the

efficiency of the Ukrainian banking system, following ton the other hand, outstanding results obtained through the noncontext, it is necessary to highlight that the financial indicators are absolute values, while the efficiency


Oriented, CRS Efficiency

These results show only if banks transfer their inputs into effects in an optimal way and if they and thus can get better outcomes using intentional inputs. In the case of financial

indicators, the profitability of the banking system parametric approach, the efficiency of the transformation of borrowed funds from the holders of deposits into loans was determined. From this point of view, the Moldovan banking system has the

problems. The financial indicators of the Moldovan banking system also indicate shortcomings in the intermediation process, but also the excess liquidity in the banking system, recorded for a long time.

Summary and Concluding Remarksindicators presented do not allow for a detailed analysis of the results of the

implementation of the Association Agreement in the banking systems in the three countries, but still, reflect some general trends that also have an impact on economic growth


In finally, we can conclude that the efficiency of banking systems contributes to the economic growth of countries and improves the quality of citizens' lives. A high degree of financial efficiency, where resources are allocated efficiently from depositors to investors, adistributions, regularly contributes to the quality of the financial system.



at the efficient border and thus obtain an efficiency score equal to one. After using the CRS efficiency, based (Figure 10), can be noticed almost identical to the scores obtained by

From obtained results, is highlighted a contradiction: on the one hand inferior results of the efficiency of the Ukrainian banking system, following ton the other hand, outstanding results obtained through the noncontext, it is necessary to highlight that the financial indicators are absolute values, while the efficiency


Efficiency of the banking systems of the Republic of Moldova, Georgia and


indicators, the profitability of the banking system parametric approach, the efficiency of the transformation of borrowed funds from the holders of deposits into loans was determined. From this point of view, the Moldovan banking system has the

problems. The financial indicators of the Moldovan banking system also indicate shortcomings in the intermediation process, but also the excess liquidity in the banking system,

Summary and Concluding Remarksindicators presented do not allow for a detailed analysis of the results of the



an conclude that the efficiency of banking systems contributes to the economic growth of countries and improves the quality of citizens' lives. A high degree of financial efficiency, where resources are allocated efficiently from depositors to investors, adistributions, regularly contributes to the quality of the financial system.




From obtained results, is highlighted a contradiction: on the one hand inferior results of the efficiency of the Ukrainian banking system, following the evaluation through the financial ratios, and on the other hand, outstanding results obtained through the noncontext, it is necessary to highlight that the financial indicators are absolute values, while the efficiency


of the banking systems of the Republic of Moldova, Georgia and


indicators, the profitability of the banking system was calculated, and in the case of the DEA nonparametric approach, the efficiency of the transformation of borrowed funds from the holders of deposits into loans was determined. From this point of view, the Moldovan banking system has the


Summary and Concluding Remarks indicators presented do not allow for a detailed analysis of the results of the







From obtained results, is highlighted a contradiction: on the one hand inferior results of the he evaluation through the financial ratios, and

on the other hand, outstanding results obtained through the non-parametric method DEA. In this context, it is necessary to highlight that the financial indicators are absolute values, while the efficiency



was calculated, and in the case of the DEA nonparametric approach, the efficiency of the transformation of borrowed funds from the holders of deposits into loans was determined. From this point of view, the Moldovan banking system has the


indicators presented do not allow for a detailed analysis of the results of the implementation of the Association Agreement in the banking systems in the three countries, but still, reflect some general trends that also have an impact on economic growth

om the evolution of GDP, we can see that the efficiency of banking systems affects economic growth. Georgia is recording the best values of bank efficiency indicators and as a result economic


The efficiency of the banking system can have an essential influence on the economic performance of a country and can be influenced by a wide range of factors, including competition in the banking system. At the same time, the efficiency of the banking system is a complex economic

Issue 174 (2019)



parametric method DEA. In this context, it is necessary to highlight that the financial indicators are absolute values, while the efficiency





indicators presented do not allow for a detailed analysis of the results of the implementation of the Association Agreement in the banking systems in the three countries, but still, reflect some general trends that also have an impact on economic growth


an conclude that the efficiency of banking systems contributes to the economic growth of countries and improves the quality of citizens' lives. A high degree of financial efficiency, where resources are allocated efficiently from depositors to investors, and risks have close pricing and distributions, regularly contributes to the quality of the financial system.

The efficiency of the banking system can have an essential influence on the economic of factors, including competition in

the banking system. At the same time, the efficiency of the banking system is a complex economic








indicators presented do not allow for a detailed analysis of the results of the implementation of the Association Agreement in the banking systems in the three countries, but still,


an conclude that the efficiency of banking systems contributes to the economic growth of countries and improves the quality of citizens' lives. A high degree of financial efficiency,

nd risks have close pricing and



21






was calculated, and in the case of the DEA non-parametric approach, the efficiency of the transformation of borrowed funds from the holders of deposits into loans was determined. From this point of view, the Moldovan banking system has the


indicators presented do not allow for a detailed analysis of the results of the implementation of the Association Agreement in the banking systems in the three countries, but still,


an conclude that the efficiency of banking systems contributes to the economic growth of countries and improves the quality of citizens' lives. A high degree of financial efficiency,

nd risks have close pricing and



22

concept, and its assessment can be extremely challenging even from a brief Republic of Moldova and Ukraine, the banking systems of the countries with the most significant problems have been highlighted in this study.

Source:

201382 banks in 2018, from 180 in 2013. During these years, Ukraine lost about half of the banking system after asset volume.

period 2013banks (Banca de Economii, Banca Social and Unibank) subsequently liquidated. As a result of these irregular operations, a considerable capitnegative impact both on the development of the national economy and on the living standards of the population, which was also reflected in the level of efficiency of the banking system.

developing the banking sector on foreign investors and on attracting remittances in the banking sector. Given the notexisting capabilities can be noticed. Thus, the selected development strategy of the Georgian banking system, in general, has shown excellent efficiency, a fact reflected in the indicators analyzed.

implied some significant challenges for the financial systems of the signatory countries. The financial sectors of the Republic of Moldova, Ukraine, and Georgia are now passing throureforms so far, to become safer, more resilient and profitable. In this sense, reforms aimed at developing the legal framework in the field of the financial system and adjusting it to EU directives was initiated. During the period 2016Moldova, such as: the Law on Banking Activity, which entered into force on 1 January 2018, the Law on the Recovery and Resolution of the Banks, the Law on the Depository Central Securities Ceover 20 secondary regulations to ensure the transposition of the aforementioned laws and the European regulatory framework for banks. The new Law on the prevention and combating of money laundering, which transposes the provisions of the European laundering, which entered into force in the EU on 27 June 2017, was approved. The legislation of the other two countries was also aligned with the requirements of the Agreements Association in the field of financ

22

concept, and its assessment can be extremely challenging even from a brief Republic of Moldova and Ukraine, the banking systems of the countries with the most significant problems have been highlighted in this study.


More substantial deficiencies were recorded in the Ukrainian banking system. In the period 2013-2018, were recognized insolvent 82 banks in 2018, from 180 in 2013. During these years, Ukraine lost about half of the banking system after asset volume.

And the situation in the Moldovan banking system, which was consideredperiod 2013-2015, has worsened considerably, as a result of some suspicious transactions by three banks (Banca de Economii, Banca Social and Unibank) subsequently liquidated. As a result of these irregular operations, a considerable capitnegative impact both on the development of the national economy and on the living standards of the population, which was also reflected in the level of efficiency of the banking system.

On the other developing the banking sector on foreign investors and on attracting remittances in the banking sector. Given the notexisting capabilities can be noticed. Thus, the selected development strategy of the Georgian banking system, in general, has shown excellent efficiency, a fact reflected in the indicators analyzed.

As pointed out earlimplied some significant challenges for the financial systems of the signatory countries. The financial sectors of the Republic of Moldova, Ukraine, and Georgia are now passing throureforms so far, to become safer, more resilient and profitable. In this sense, reforms aimed at developing the legal framework in the field of the financial system and adjusting it to EU directives was initiated. During the period 2016Moldova, such as: the Law on Banking Activity, which entered into force on 1 January 2018, the Law on the Recovery and Resolution of the Banks, the Law on the Depository Central Securities Ceover 20 secondary regulations to ensure the transposition of the aforementioned laws and the European regulatory framework for banks. The new Law on the prevention and combating of money laundering, which transposes the provisions of the European laundering, which entered into force in the EU on 27 June 2017, was approved. The legislation of the other two countries was also aligned with the requirements of the Agreements Association in the field of financial services.

concept, and its assessment can be extremely challenging even from a brief analysis of some indicators of the efficiency of the banking systems of Georgia, the Republic of Moldova and Ukraine, the banking systems of the countries with the most significant problems have been highlighted in this study.

The World Bank Data

More substantial deficiencies were recorded in the Ukrainian banking system. In the period 2018, were recognized insolvent

82 banks in 2018, from 180 in 2013. During these years, Ukraine lost about half of the banking system after asset volume.

And the situation in the Moldovan banking system, which was considered2015, has worsened considerably, as a result of some suspicious transactions by three

banks (Banca de Economii, Banca Social and Unibank) subsequently liquidated. As a result of these irregular operations, a considerable capitnegative impact both on the development of the national economy and on the living standards of the population, which was also reflected in the level of efficiency of the banking system.

On the other hand, Georgia, due to the limited resources of the national economy, has focused on developing the banking sector on foreign investors and on attracting remittances in the banking sector. Given the not-too-high-funding possibilities for banks in this countexisting capabilities can be noticed. Thus, the selected development strategy of the Georgian banking system, in general, has shown excellent efficiency, a fact reflected in the indicators analyzed.

As pointed out earlimplied some significant challenges for the financial systems of the signatory countries. The financial sectors of the Republic of Moldova, Ukraine, and Georgia are now passing throureforms so far, to become safer, more resilient and profitable. In this sense, reforms aimed at developing the legal framework in the field of the financial system and adjusting it to EU directives was initiated. During the period 2016Moldova, such as: the Law on Banking Activity, which entered into force on 1 January 2018, the Law on the Recovery and Resolution of the Banks, the Law on the Depository Central Securities Ceover 20 secondary regulations to ensure the transposition of the aforementioned laws and the European regulatory framework for banks. The new Law on the prevention and combating of money laundering, which transposes the provisions of the European laundering, which entered into force in the EU on 27 June 2017, was approved. The legislation of the other two countries was also aligned with the requirements of the Agreements Association in the field

ial services.


concept, and its assessment can be extremely challenging analysis of some indicators of the efficiency of the banking systems of Georgia, the

Republic of Moldova and Ukraine, the banking systems of the countries with the most significant problems have been highlighted in this study.

Figure 11:


More substantial deficiencies were recorded in the Ukrainian banking system. In the period 2018, were recognized insolvent

82 banks in 2018, from 180 in 2013. During these years, Ukraine lost about half of the banking system


banks (Banca de Economii, Banca Social and Unibank) subsequently liquidated. As a result of these irregular operations, a considerable capitnegative impact both on the development of the national economy and on the living standards of the population, which was also reflected in the level of efficiency of the banking system.

hand, Georgia, due to the limited resources of the national economy, has focused on developing the banking sector on foreign investors and on attracting remittances in the banking sector.

funding possibilities for banks in this countexisting capabilities can be noticed. Thus, the selected development strategy of the Georgian banking system, in general, has shown excellent efficiency, a fact reflected in the indicators analyzed.

As pointed out earlier, the implementation of Association Agreements with the European Union implied some significant challenges for the financial systems of the signatory countries. The financial sectors of the Republic of Moldova, Ukraine, and Georgia are now passing throureforms so far, to become safer, more resilient and profitable. In this sense, reforms aimed at developing the legal framework in the field of the financial system and adjusting it to EU directives was initiated. During the period 2016Moldova, such as: the Law on Banking Activity, which entered into force on 1 January 2018, the Law on the Recovery and Resolution of the Banks, the Law on the Depository Central Securities Ceover 20 secondary regulations to ensure the transposition of the aforementioned laws and the European regulatory framework for banks. The new Law on the prevention and combating of money laundering, which transposes the provisions of the European laundering, which entered into force in the EU on 27 June 2017, was approved. The legislation of the other two countries was also aligned with the requirements of the Agreements Association in the field


concept, and its assessment can be extremely challenging analysis of some indicators of the efficiency of the banking systems of Georgia, the

Republic of Moldova and Ukraine, the banking systems of the countries with the most significant problems have been highlighted in this study.

Figure 11: GDP growth 2013


More substantial deficiencies were recorded in the Ukrainian banking system. In the period 2018, were recognized insolvent (with subsequent liquidation), a large number of banks reaching



banks (Banca de Economii, Banca Social and Unibank) subsequently liquidated. As a result of these irregular operations, a considerable capital hole was created in the financial sector, which had a negative impact both on the development of the national economy and on the living standards of the population, which was also reflected in the level of efficiency of the banking system.



ier, the implementation of Association Agreements with the European Union implied some significant challenges for the financial systems of the signatory countries. The financial sectors of the Republic of Moldova, Ukraine, and Georgia are now passing throureforms so far, to become safer, more resilient and profitable. In this sense, reforms aimed at developing the legal framework in the field of the financial system and adjusting it to EU directives was initiated. During the period 2016-2018 a series of relevant laws were approved in the Republic of Moldova, such as: the Law on Banking Activity, which entered into force on 1 January 2018, the Law on the Recovery and Resolution of the Banks, the Law on the Depository Central Securities Ceover 20 secondary regulations to ensure the transposition of the aforementioned laws and the European regulatory framework for banks. The new Law on the prevention and combating of money laundering, which transposes the provisions of the European laundering, which entered into force in the EU on 27 June 2017, was approved. The legislation of the other two countries was also aligned with the requirements of the Agreements Association in the field


concept, and its assessment can be extremely challenging - both quantitative and qualitative. However, analysis of some indicators of the efficiency of the banking systems of Georgia, the

Republic of Moldova and Ukraine, the banking systems of the countries with the most significant

GDP growth 2013-


More substantial deficiencies were recorded in the Ukrainian banking system. In the period (with subsequent liquidation), a large number of banks reaching



banks (Banca de Economii, Banca Social and Unibank) subsequently liquidated. As a result of these al hole was created in the financial sector, which had a

negative impact both on the development of the national economy and on the living standards of the population, which was also reflected in the level of efficiency of the banking system.



ier, the implementation of Association Agreements with the European Union implied some significant challenges for the financial systems of the signatory countries. The financial sectors of the Republic of Moldova, Ukraine, and Georgia are now passing throureforms so far, to become safer, more resilient and profitable. In this sense, reforms aimed at developing the legal framework in the field of the financial system and adjusting it to EU directives

2018 a series of relevant laws were approved in the Republic of Moldova, such as: the Law on Banking Activity, which entered into force on 1 January 2018, the Law on the Recovery and Resolution of the Banks, the Law on the Depository Central Securities Ceover 20 secondary regulations to ensure the transposition of the aforementioned laws and the European regulatory framework for banks. The new Law on the prevention and combating of money laundering, which transposes the provisions of the European Directive on prevention and combating money laundering, which entered into force in the EU on 27 June 2017, was approved. The legislation of the other two countries was also aligned with the requirements of the Agreements Association in the field


both quantitative and qualitative. However, analysis of some indicators of the efficiency of the banking systems of Georgia, the


-2017, (%)








funding possibilities for banks in this country, the right level of utilization of existing capabilities can be noticed. Thus, the selected development strategy of the Georgian banking system, in general, has shown excellent efficiency, a fact reflected in the indicators analyzed.

ier, the implementation of Association Agreements with the European Union implied some significant challenges for the financial systems of the signatory countries. The financial sectors of the Republic of Moldova, Ukraine, and Georgia are now passing throureforms so far, to become safer, more resilient and profitable. In this sense, reforms aimed at developing the legal framework in the field of the financial system and adjusting it to EU directives

2018 a series of relevant laws were approved in the Republic of Moldova, such as: the Law on Banking Activity, which entered into force on 1 January 2018, the Law on the Recovery and Resolution of the Banks, the Law on the Depository Central Securities Ceover 20 secondary regulations to ensure the transposition of the aforementioned laws and the European regulatory framework for banks. The new Law on the prevention and combating of money laundering,

Directive on prevention and combating money laundering, which entered into force in the EU on 27 June 2017, was approved. The legislation of the other two countries was also aligned with the requirements of the Agreements Association in the field











ry, the right level of utilization of existing capabilities can be noticed. Thus, the selected development strategy of the Georgian banking system, in general, has shown excellent efficiency, a fact reflected in the indicators analyzed.

ier, the implementation of Association Agreements with the European Union implied some significant challenges for the financial systems of the signatory countries. The financial sectors of the Republic of Moldova, Ukraine, and Georgia are now passing through the most profound reforms so far, to become safer, more resilient and profitable. In this sense, reforms aimed at developing the legal framework in the field of the financial system and adjusting it to EU directives

2018 a series of relevant laws were approved in the Republic of Moldova, such as: the Law on Banking Activity, which entered into force on 1 January 2018, the Law on the Recovery and Resolution of the Banks, the Law on the Depository Central Securities Ceover 20 secondary regulations to ensure the transposition of the aforementioned laws and the European regulatory framework for banks. The new Law on the prevention and combating of money laundering,







And the situation in the Moldovan banking system, which was considered safe, during the 2015, has worsened considerably, as a result of some suspicious transactions by three


negative impact both on the development of the national economy and on the living standards of the


ry, the right level of utilization of existing capabilities can be noticed. Thus, the selected development strategy of the Georgian banking system, in general, has shown excellent efficiency, a fact reflected in the indicators analyzed.

ier, the implementation of Association Agreements with the European Union implied some significant challenges for the financial systems of the signatory countries. The financial

gh the most profound reforms so far, to become safer, more resilient and profitable. In this sense, reforms aimed at developing the legal framework in the field of the financial system and adjusting it to EU directives

2018 a series of relevant laws were approved in the Republic of Moldova, such as: the Law on Banking Activity, which entered into force on 1 January 2018, the Law on the Recovery and Resolution of the Banks, the Law on the Depository Central Securities Center and over 20 secondary regulations to ensure the transposition of the aforementioned laws and the European regulatory framework for banks. The new Law on the prevention and combating of money laundering,


Issue 174 (2019)





safe, during the 2015, has worsened considerably, as a result of some suspicious transactions by three


negative impact both on the development of the national economy and on the living standards of the


ry, the right level of utilization of existing capabilities can be noticed. Thus, the selected development strategy of the Georgian banking

ier, the implementation of Association Agreements with the European Union implied some significant challenges for the financial systems of the signatory countries. The financial

gh the most profound reforms so far, to become safer, more resilient and profitable. In this sense, reforms aimed at developing the legal framework in the field of the financial system and adjusting it to EU directives

2018 a series of relevant laws were approved in the Republic of Moldova, such as: the Law on Banking Activity, which entered into force on 1 January 2018, the Law

nter and over 20 secondary regulations to ensure the transposition of the aforementioned laws and the European regulatory framework for banks. The new Law on the prevention and combating of money laundering,



To conclude the effectiveness of adapting the Eastern Partnership countries' financial systems to EU standards, it is important to understand the rationale underlying the regulation, the benefits to be achieved and the costs associated with the implementation of the regulation. Effects will be visible in time for many actors in the financial system (clients of financial institutions, financial institutions: the management of financial institutions that are the legal entity, shareholders: investors who have made an investment in financial institutions, companies in each country: these three countries will benefit from favorable economic improvements), while costs are currently borne. In the Republic of Moldova and Ukraine, the costs of implementation have also been amplified by crisis periods through which these countries' financial systems have passed, which, however, already been exceeded and can already be noticed the results on the efficiency of financial systems. References [1] Allen, F. and D. Gale. (2000). Comparing Financial Systems, Cambridge, MA: MIT Press. [2] Altunbaş Y., Evans L., Molyneux P. (2001). Bank Ownership and Efficiency // Journal of

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