Bank operating ratios may further be distorted by differences in accounting practices regarding the valuation of assets (book rather than market value or replacement cost), treatment of depreciation and other reserves (as liabilities rather than asset offsets), level of loan loss provisioning (inadequate provisioning inflating the book value of loans and equity as well as overstating all income and profit ratios of banks), and use of hidden reserves. For developing countries where banks may have large unprovided nonperforming loans, inadequate provisioning may seriously distort reported operating ratios.

Finally, a very important factor affecting the level of bank operating ratios is the range and quality of services offered by banks. Banks that offer a limited range of services, operate a small number of branches, do not use computerized facilities, and rely on labor-intensive and slow processing methods will tend to have low operating costs, especially if thev operate in countries with low wages and low rents. However, such banks transfer many of the operating costs of banking to their customers in the form of inconvenient location of branches and long and slow moving lines. Their low cost ratios would not be an indication of operating efficiency.

A comparison of bank operating ratios in Hungary and selected developed and developing . Banks in countries provides interesting insights but needs to be interpreted with great caution"<sup>4</sup> Germany, the Netherlands, France, and Canada reported during the period 1985-89 interest margins betweern 2% and 3%, gross income margins between 2.5% and 3.5%, and ROAs between 0.6% and i%. On the other hand, banks in the United States, the United Kingdom, Italy and Spain operated with much higher ratios ranging up to interest margins of 4% and gross income margins of well over 5%, although their ROAs were not higher than 1.25%. Banks in Austria and France operate with low ROAs, which are largely explained by their very high leverage.

Among developing countries, banks in Turkey report high gross income margins, followed by Moroccan and Portuguese banks. Turkish banks also report very high ROAs. However, among all the countries surveyed in this paper, Hungarian banks have by far the highest gross income margins and ROAs. The interest margins of Hungarian banks (based on IAS data for 1990) were well over 4% (except for the NSB), their gross income margins around 8% and their ROAs over 3%. Indeed, the joint venture banks reported ROAs of over 6%.To a large extent, these are explained by the low leverage and high inflation. But a significant part must be attributed either to the need to provide against unrecognized nonperforming loans or to high levels of real profitability.

Except for the American banks, which suffered from large volumes of nonperforming loans during this period and were forced to make unusually large provisions, the ratios of most other banks reflect their business mix, with banks that have a greater exposure to high cost/high margin business generally reporting higher operating asset ratios. Worth noting is the experience of the UK building societies, which h. - traditionally specialized in housing finance, a market with low margins and low costs. They had a gross income margin of only 2.4% but a ROA of over 1.25%.

14 Bank operating ratios in some developed countries and the problems of international comparisons are extensively reviewed in Vittas (1991), while detailed data for most OECD countries are reported in OECD (1991). Those for developing countries are obtained from various World Bank reports. Annex 3 provides tables with detailed data on bank operating ratios for selected developed and developing countries.

15