Inefficient or just different? Effects of heterogeneity on bank efficiency scores

In this paper, we show the importance of accounting for heterogeneity among sample firms in stochastic frontier analysis. For a fairly homogenous sample of German savings and cooperative banks, we analyze how alternative theoretical assumptions regarding the nature of heterogeneity can be modeled and the extent to which the respective empirical specifications affect estimated efficiency levels and rankings. We find that the level of efficiency scores is affected in the case of both cost and profitmodels. On the cost side especially, level and rank correlations show that different specifications identify different banks as being best or worst performers. Our main conclusion is that efficiency studies in general and bank efficiency studies in particular should account for heterogeneity across sample firms. Especially when efficiency measures are employed for policy purposes, a careful choice of models and transparency regarding maximization methods are essential to be able to make inferences about managerial behavior. --Heterogeneity,X-efficiency,benchmarking,bank production

Market Power and Cost Efficiency in the African Banking Industry

Purpose- In this study, we test the so-called ‘Quiet Life Hypothesis’ (QLH) which postulates that banks with market power are less efficient. Design/methodology/approach- We employ instrumental variable Ordinary Least Squares, Fixed Effects, Tobit and Logistic regressions. The empirical evidence is based on a panel of 162 banks consisting of 42 African countries for the period 2001-2011. There is a two-step analytical procedure. First, we estimate Lerner indices and cost efficiency scores. Then, we regress cost efficiency scores on Lerner indices contingent on bank characteristics, market features and the unobserved heterogeneity. Findings- The empirical evidence does not support the QLH because market power is positively associated with cost efficiency. Originality/value- Owing to data availability constraints, this is one of the few studies to test the QLH in African banking

Analysis of the BRIC Countries Technical Efficiency Patterns Using Stochastic Frontier Approach

This study investigates the technical efficiency of BRIC-countries (Brazil, Russia, India, China) at the disaggregated level of six economic activities using stochastic frontier approach. Technical efficiency scores and efficiency externalities effects of international trade and foreign direct investment inflows are estimated based on the panel of sixteen countries - G20 members - over the period from 1995 to 2009. The results suggest that foreign direct investment is a conduit of the positive technological spillovers in all sectors under analysis. Once controlling for the domestic level of the human capital that captures technology absorptive capacity, the positive effect of the international trade is observed in the industrial sector in general and manufacturing in particular, as well as in trade, hotels and restaurants. The positive impact of the human capital on the level of technical efficiency is significant for all sectors, except for the agriculture, and robust for two different measures of human capital

Assessing the potential for knowledge-based development in transition countries. Bruegel Working Paper 2010/01, May 2010

This Working Paper by Bruegel Senior Fellow Reinhilde Veugelers examines the potential for a knowledge-based growth path in transition countries of central and eastern Europe, the Caucasus and Central Asia. The paper looks closely at how total-factor productivity, a residual growth factor commonly interpreted as reflecting technological progress, drives growth rates in these economies which exhibit a much lower GDP per capita compared to the EU15 or the United States. By analysing the prerequisites for knowledge-based growth, the author explains why transition countries are at a systemic disadvantage relative to the EU15, US and Japan and have limited potential for knowledge-based growth

Bank Efficiency in the Enlarged European Union

This paper aims to estimate bank efficiency differences across member states of the European Union and tries to explain their causes. We show on an empirical basis that the level and spread of bank efficiency in the EU and their changes are significantly determined by characteristics of operational environment and the “conscious” behaviour of management.In the long term, through the integration of financial markets and institutions, as well as the establishment of the Single European Banking Market, the impact of advantages and disadvantages underlying the operational environment is reduced or eliminated; therefore only managerial ability is of any relevance. Our findings suggest that there is a costefficiency gap and convergence between the old and new member states, irrespective of the specifications of the model. With respect to profit efficiency, however, differences in efficiency between the two regions are only established after controlling for some major characteristics of the varying operational environments. Our study also investigates the relevance of and the correlation between accounting-based and statistics-based efficiency indicators. We conclude that the accounting based efficiency indicators are inadequate for managing heterogeneity arising from institutional and operational environments. Hence such indicators only allow limited cross-sectional comparison through time.parametric approach, X- and alternative profit-efficiency, Fourier-flexible functional form, banking system.

Do Islamic and conventional banks have the same technology?

Is there a technology gap between Islamic and conventional banks? Do Islamic and conventional banks have different cost efficiency levels? We show that conventional and Islamic banks have similar mean (aggregate) cost efficiency levels in the MENA area and there is no technology gap between the two types of banks. At the country level, Islamic banks are more cost efficient than conventional banks in Indonesia, Pakistan, Turkey and United Arab Emirates, and less efficient in Bangladesh, Kuwait, Malaysia and Tunisia. We analyse a very large sample of banks in twelve MENA and South East Asian countries between 2000 and 2006 and we use the meta-frontier approach to account for the sample heterogeneity

Relationship Lending, Distance and Efficiency in a Heterogeneous Banking System

During the last decades banks have progressively moved towards centralized and hierarchical organizational structures. Therefore, the investigation of the determinants of bank efficiency and relationships with the functional distance between the bank head-quarter and operational units have become increasingly important. This paper extends the literature on bank efficiency examining the impact of different bank business models on the efficiency of the Italian banks, distinguished by size and type over the period 2006-2009. Using a stochastic frontier approach, the intertemporal relationships between bank efficiency and some key variables, as distance and income diversification (used as proxies of different organizational banking models) are investigated. Results suggest that organizational structure significantly affects cost efficiency, being different between bank groups.relationship lending; bank groups; credit risk; stochastic frontiers; panel data

EFFECTS OF FINANCIAL CAPITAL ON COLOMBIAN BANKING EFFICIENCY

In this paper we discuss cost and profit efficiency on the Colombian financial market in the period 1989-2003, using stochastic frontier efficiency analysis. During the period, the cost efficient frontier deteriorates, but profit efficient frontier is relatively stable. We found significant difference when we compare the efficiency scores among different types of financial intermediaries. Additionally, our analysis shows that the scores for profit and cost efficiency have different distributions. Also, we found big differences between profit and cost efficiency among the different type of banks. This is evidence in favor of the existence of collusive behavior of some banks, which allows them to capture oligopoly rents.frontier, efficiency, cost, profit, financial capital.