The aim of this paper is two-fold. First, we estimate cost efficiency of Russian commercial banks using stochastic frontier analysis with output quality and risk factors applied to the data of Russian banks. To divide Russian commercial banks into the homogeneous groups we use Pareto distribution of banks’ total assets. Medium banks are seemed to be the most cost efficient. Large banks have the lowest level of cost efficiency.

Second, we explain the variations in cost efficiency among the banks’ homogeneous groups. To do this we introduce CAMEL variables as well as ownership type of the Russian banks. We find that some factors, in particular, equity to asset ratio, ratio of nonperforming loans to total loans, liquid assets to total assets ratio significantly influence cost efficiency of the banks in the Russian Federation. In addition, when banks’ intermediation level increases, cost efficiency of small and medium banks becomes higher. Medium banks having foreign investors tend to be more cost efficient in comparison with other groups of banks.