Does Input Substitutability in Banking Differ across Accession and Non-Accession Countries in Central and Eastern Europe?

Does Input Substitutability in Banking Differ across Accession and Non-Accession Countries in Central and Eastern Europe?

This study extends previous research by comparing banks across European Union (EU) accession and non-accession countries of central-eastern Europe in order to detect differences that perhaps have implications related to policy prescriptions for joining the EU. Using commercial banking data from 17 centraleastern European countries for 2000-04, the period leading up to the EU accessions of 2004 and 2007, a multiproduct translog cost function approach reveals that banks in accession countries generally display stronger input substitutability across capital, labor and deposits than that displayed by banks in non-accession countries. The implication regarding the higher substitutability between capital and labor in EU accession countries is lower banking industry employment in those countries after EU accession. Bank deposits are also substitutes for labor, reflecting the substantial impact of international competition and technological advancements in the industry. As a result of these relationships, pre-accession preparation for the forthcoming banking industry changes may be necessary in some instances.