A Productivity analysis of Eastern European banking taking into account risk decomposition and environmental variables

This paper develops a new Luenberger productivity which is applied to a technology where the desirable and undesirable outputs are jointly produced and are possibly negative. The components of this Luenberger productivity index - the efficiency change and the components of the technological shift - are then decomposed into factors determined by the technology, adjusted for ‘risk and environment’, ‘risk management’ and ‘environmental effects’. The method is applied to Central and Eastern European banks operating during 1998–2003 utilising three alternative input/output methodologies (intermediation, production and profit/revenue). Additionally, the comparative analysis of the sensitivity of the productivity indices in the choice of the methodologies is undertaken using statistical and kernel density tests. It is found that the main driver of productivity change in Central and Eastern European banks is technological improvement, which, in the beginning of the analysed period, hinged on the banks’ ability to capitalise on advanced technology and successfully take into account risk and environmental factors. Whereas, in the later sampled periods, we show that one of the most important factors of technological improvement/decline is risk management. Finally, the tests employed confirm previous findings, such as Pasiouras (2008) in this journal, that different input/output methodologies produce statistically different productivity results. Indeed, we also find that external factors, such as a risk in the economy and banking production, and a ‘corruption perception’ affect the productivity of banks.Luenberger productivity index; DEA; banking; undesirable outputs; negative data.

A non-parametric efficiency and productivity analysis of transition banking

This thesis examines banking efficiency and the productivity of thirteen transition Central and Eastern European banking systems during 1998-2003 using Data Envelopment Analysis (DEA). It proposes a non-parametric methodology for non-radial Russell output efficiency measure of banking firms, incorporating risk as an undesirable output. In addition, the proposed efficiency measure handles unrestricted data, i. e. both positive and negative. The Luenberger productivity index is suggested, which is applicable to technology where the desirable and undesirable outputs are jointly produced, and are possibly negative. Furthermore, the thesis addresses the main issue in the literature on banking performance measurement, which concerns the lack of consistency in the conceptual and theoretical considerations in describing the banking production process. Consequently, a metaanalysis tool, to examine the choice of inputs and outputs definitions in the banking efficiency literature, is suggested. In addition, the performance measures are estimated using three alternative definitions of the banking production process focusing on the risk and environmental dimensions of bank efficiency and productivity, with further comparative analysis using bootstrapping and kernel density techniques. Overall, the empirical results suggest that in Central and Eastern Europe Czech, Hungarian and Polish banks were the most technical efficient banks and the banking risk was mainly affected by external environmental factors during the analyzed period. Productivity analysis implies that the main driver of productivity change in the Central and Eastern European banks is the technological improvement. As meta-analysis revealed, the choice of particular approach of describing the banking production process is determined not by the availability of particular input or output variable information but the concepts of researcher's theoretical considerations. Statistical tests and density analysis indicate that efficiency scores, returns parameters and productivity indexes are sensitive to the choice of particular approaches

A non-parametric efficiency and productivity analysis of transition banking

This thesis examines banking efficiency and the productivity of thirteen transition Central and Eastern European banking systems during 1998-2003 using Data Envelopment Analysis (DEA). It proposes a non-parametric methodology for non-radial Russell output efficiency measure of banking firms, incorporating risk as an undesirable output. In addition, the proposed efficiency measure handles unrestricted data, i. e. both positive and negative. The Luenberger productivity index is suggested, which is applicable to technology where the desirable and undesirable outputs are jointly produced, and are possibly negative. Furthermore, the thesis addresses the main issue in the literature on banking performance measurement, which concerns the lack of consistency in the conceptual and theoretical considerations in describing the banking production process. Consequently, a metaanalysis tool, to examine the choice of inputs and outputs definitions in the banking efficiency literature, is suggested. In addition, the performance measures are estimated using three alternative definitions of the banking production process focusing on the risk and environmental dimensions of bank efficiency and productivity, with further comparative analysis using bootstrapping and kernel density techniques. Overall, the empirical results suggest that in Central and Eastern Europe Czech, Hungarian and Polish banks were the most technical efficient banks and the banking risk was mainly affected by external environmental factors during the analyzed period. Productivity analysis implies that the main driver of productivity change in the Central and Eastern European banks is the technological improvement. As meta-analysis revealed, the choice of particular approach of describing the banking production process is determined not by the availability of particular input or output variable information but the concepts of researcher's theoretical considerations. Statistical tests and density analysis indicate that efficiency scores, returns parameters and productivity indexes are sensitive to the choice of particular approaches.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

Environmental Factors Affecting Hong Kong Banking: A Post-Asian Financial Crisis Efficiency Analysis

Within the banking efficiency analysis literature there is a dearth of studies which have considered how banks have ‘survived’ the Asian financial crisis of the late 1990s. Considering the profound changes that have occurred in the region’s financial systems since then, such an analysis is both timely and warranted. This paper examines the evolution of Hong Kong’s banking industry’s efficiency and its macroeconomic determinants through the prism of two alternative approaches to banking production based on the intermediation and services-producing goals of bank management over the post-crisis period. Within this research strategy we employ Tone’s (2001) Slacks-Based Model (SBM) combining it with recent bootstrapping techniques, namely the non-parametric truncated regression analysis suggested by Simar and Wilson (2007) and Simar and Zelenyuk’s (2007) group-wise heterogeneous sub-sampling approach. We find that there was a significant negative effect on Hong Kong bank efficiency in 2001, which we ascribe to the fallout from the terrorist attacks in America in 9/11 and to the completion of deposit rate deregulation that year. However, post 2001 most banks have reported a steady increase in efficiency leading to a better ‘intermediation’ and ‘production’ of activities than in the base year of 2000, with the SARS epidemic having surprisingly little effect in 2003. It was also interesting to find that the smaller banks were more efficient than the larger banks, but the latter were also able to enjoy economies of scale. This size factor was linked to the exportability of financial services. Other environmental factors found to be significantly impacting on bank efficiency were private consumption and housing rent.Finance and Banking; Productivity; Efficiency.

Accounting for environmental factors, bias and negative numbers in efficiency estimation: A bootstrapping application to the Hong Kong banking sector

This paper examines the evolution of Hong Kong’s banking industry’s technical efficiency, and its macroeconomic determinants, during the period 2000-2006 through the prism of two alternative approaches to efficiency estimation, namely the intermediation and production approaches. Using a modified (Sharp, Meng and Liu, 2006) slacks-based model (Tone, 2001), and purging the efficiency estimates for random errors (Simar and Zelenyuk, 2007) , we firstly analyse the trends in bank efficiency. We then identify the ‘environmental’ factors that significantly affect the efficiency scores using an adaptation (Kenjegalieva et al. 2009) of the truncated regression approach suggested by Simar and Wilson. 2007). The first part of the analysis reveals that the Hong Kong banking industry suffered a severe downturn in estimated technical efficiency during 2001. It subsequently recovered, posting average efficiency scores of 92 per cent and 85 percent under the intermediation and production approaches respectively by the end of 2006. As for the sub-group analysis, commercial banks are, on average, shown to be the most efficient operators, while the investment bank group are shown to be the least efficient. Finally, with respect to the truncated regression analysis, the results suggest that smaller banks are more efficient than their larger counterparts, although larger banks are still able to enjoy gains from scale economies and benefit from the export of financial services. Moreover, private housing rent and the net export of goods and services are found to be negatively correlated with bank efficiency, while private consumption is shown to be positively correlated.Hong Kong Banks; DEA; Slacks; Environmental factors, Negative numbers; Bias.

A New Approach to Dealing With Negative Numbers in Efficiency Analysis: An Application to the Indonesian Banking Sector

In one of the first stand-alone studies covering the whole of the Indonesian banking industry, and utilising a unique dataset provided by the Indonesian central bank, this paper analyses the levels of intermediation-based efficiency obtaining during the period 2003-2007. Using a new approach (i.e., semi-oriented radial measure Data Envelopment Analysis, or ‘SORM DEA’) to handling negative numbers (Emrouznejad et al., 2010) and combining it with Tone’s (2001) slacks-based model (SBM) to form an input-oriented, non-parametric SORM SBM model, we firstly estimate the relative average efficiencies of Indonesian banks, both overall, by group, as determined by their ownership structure, and by status (‘listed’/’Islamic’). For robustness, a range-directional (RD) model suggested by Silva Portela et al. (2004) was also employed to handle the negative numbers. In the second part of the analysis, we adopt Simar and Wilson’s (2007) bootstrapping methodology to formally test for the impact of size, ownership structure and status on Indonesian bank efficiency. In addition, we formally test the two models most widely suggested in the literature for controlling for bank risk – namely, those involving the inclusion of provisions for loan losses and equity capital respectively as inputs – to check the robustness of the results to the choice of risk variable. The results demonstrate a high degree of sensitivity of the average bank efficiency scores to the choice of methodology for handling negative numbers – with the RD model consistently delivering efficiency scores some 14% on average above those from the SORM SBM model – and to the choice of risk control variable under the RD model, but only a limited sensitivity to the choice of risk control variable under the SORM SBM model. With respect to group rankings, most model combinations find the ‘state-owned’ group to be the most efficient, with average overall efficiency levels ranging between 64% and 97%; while all model combinations find the ‘regional government-owned’ group to be the least efficient, with average overall efficiency levels ranging between 41% and 64%. As for the impact of bank ‘status’ on the efficiency scores, both the Islamic banks and the listed banks perform better than the industry average in the majority of model combinations. Finally, the results for the impact of scale on the efficiency scores are ambiguous. Under the RD model, and irrespective of the choice of risk control variable, size is very important in determining intermediation-based efficiency. Under the SORM SBM model, however, large banks’ performance is not significantly different from that of the medium-sized banks when equity capital is used as the risk control variable, although the medium-sized banks do out-perform small banks. Moreover, when loan loss provisions are used as the risk control variable, medium-sized banks are shown to significantly out-perform both large and small banks, with the large banks being the least efficient.Indonesian Finance and Banking; Efficiency.

Efficiency and Malmquist Indices of Productivity Change in Indonesian Banking

In this study we utilise a non-parametric, slacks-based model (SBM) approach to analyse efficiency and productivity changes for Indonesian banks over the period January 2006 to July 2007. Efficiency scores and Malmquist productivity indices are estimated using the approach for efficiency and super-efficiency estimation suggested by Tone (2001, 2002). Additionally, the Malmquist indices are decomposed into technical efficiency change and technological shift components. Using monthly supervisory data provided by Bank Indonesia we find that, under the intermediation approach to efficiency estimation, average bank efficiency was reasonably stable during the sample period, ranging between 70% and 82%, with 92 of the 130 banks in existence at that time having efficiency scores of over 70%, including 10 with (super)efficiency scores above unity. We also find that technical efficiencies under the Intermediation approach to describing the banking production process are relatively stable. Malmquist results for the industry suggest that the main driver of productivity growth is technological progress. A strategy based on the gradual adoption of newer technology, according to our results, thus seems to have the highest potential for boosting the productivity of the financial intermediary operations of Indonesian banks.Indonesian Finance and Banking; Productivity; Efficiency.

Productivity Changes and Risk Management in Indonesian Banking: An Application of a New Approach to Constructing Malmquist Indices

In this study, we utilise a new, non-parametric efficiency measurement approach which combines the semi-oriented radial measure data envelopment analysis (SORM-SBM-DEA) approach for dealing with negative data (Emrouznejad et al., 2010) with the slacks-based efficiency measures of Tone (2001, 2002) to analyse productivity changes for Indonesian banks over the period Quarter I 2003 to Quarter II 2007. Having constructed the Malmquist indices, using data provided by Bank Indonesia (the Indonesian central bank), for the banking industry and different bank types (i.e., listed and Islamic) and groupings, we then decomposed the industry’s Malmquist into its technical efficiency change and frontier shift components. Finally, we analysed the banks’ risk management performance, using Simar and Wilson’s (2007) truncated regression approach, before assessing its impact on productivity growth. The first part of the Malmquist analysis showed that average productivity changes for the Indonesian banking industry tended to be driven, over the sample period, by technological progress rather than by frontier shift, although a relatively stable pattern was exhibited for most of the period. However, at the beginning of the considered period, state-owned and foreign banks, as well as Islamic banks, exhibited volatile productivity movements, mainly caused by shifts in the technological frontier. With respect to the risk management analysis, most of the balance sheet variables were shown to have had the expected impact on risk management efficiency. While the risk management decomposition of technical efficiency change and frontier risk components demonstrated that, by the end of the sample period, the change in risk management efficiency and risk management effects had the same dynamic pattern, resulting in the analogous dynamics for technical efficiency changes. Therefore, a strategy based on the gradual adoption of newer technology, with a particular focus on internal risk management enhancement, seems to offer the highest potential for boosting the productivity of the financial intermediary operations of Indonesian banks.Indonesian Finance and Banking; Productivity; Efficiency.

Efficiency in Indonesian Banking: Recent Evidence

In one of the first stand-alone studies covering the whole of the Indonesian banking industry, and utilising a unique dataset provided by the Indonesian central bank, this paper analyses the levels of intermediation-based efficiency obtaining during 2007. Using Tone’s (2001) input-oriented, non-parametric, slacks-based DEA model, and modifying it where necessary to deal with negative inputs and outputs (Sharp et al. 2006), we firstly estimate the relative average efficiencies of Indonesian banks, both overall, and by group, as determined by their total asset size and status. In the second part of the analysis, we adopt Simar and Wilson’s (2007) bootstrapping methodology to eliminate the ‘bias’ in the efficiency estimates and to formally test for the impact of size and status on Indonesian bank efficiency. The results from the initial analysis show that: (i) average bank efficiency within the industry during 2007 lay between 62% – 67%; (ii) the most efficient group of banks was the ‘state-owned’ group with an average efficiency score of over 90%, with the least efficient group being the ‘regional government-owned’ banks with average efficiency scores between 45% and 58%; (iii) ‘listed banks’ performed better, on average, than ‘non-listed banks’; and (iv) ‘Islamic banks’, despite their different operational structure when compared with conventional banks, enjoyed average efficiency scores between 54% and 74%. In the second stage of the analysis, the bias-corrected efficiency scores demonstrate that ‘regional government-owned’, ‘foreign exchange’, ‘non-foreign exchange’, ‘joint-venture’ and ‘foreign’ groupings were significantly less efficient than ‘state-owned’ banks, with the first-mentioned being the most inefficient and the other groupings ranked in ascending order of efficiency, as listed. Moreover, large banks were shown to be more efficient than their smaller counterparts, providing support for Bank Indonesia’s consolidation policies.Indonesian Finance and Banking; Efficiency.

Banking Efficiency and Stock Market Performance: An Analysis of Listed Indonesian Banks

This paper examines the monthly efficiency and productivity of listed Indonesian banks and their market performance through the prism of two modelling techniques, efficiency and super-efficiency, over the period January 2006 to July 2007. Within this research strategy we employ Tone’s (2001) non-parametric, Slacks-Based Model (SBM) and Tone’s (2002) super-efficiency SBM combining them with recent bootstrapping techniques, namely the non-parametric truncated regression analysis suggested by Simar and Wilson (2007). In the case of the SBM efficiency scores, the Simar and Wilson methodology was adapted to two truncations, whereas in the super-efficiency framework the original technique was utilised. As suggested by neo-classical theory, we find that the stock market values banks in accordance with their performance. Moreover, it is found that the JCI index of the Indonesian Stock Exchange is positively related to bank efficiency. Another interesting finding is that the coefficient for the share of foreign ownership is negative and statistically significant in the super-efficiency modelling. This suggests that Indonesian banks with foreign ownership tend to be less efficient than their domestic counterparts. Finally, Malmquist productivity results suggest that, over the study’s horizon, the sample banks displayed volatile productivity patterns in their profit-generating operations.Indonesian Banking, Emerging Markets, Productivity, Efficiency.