A long-term analysis of efficiency in the Italian banking system from 1861 to 2010

Abstract

In this paper, we analyse the performance of the Italian banking system in the 1861–2010 period. In this regard, we apply a stochastic frontier analysis cum ARDL procedure. First, we implement stochastic frontier analysis to the cost function of the Italian banking system in order to identify the years in which the banking system allocated its resources most efficiently. To this end, we propose a version of the stochastic frontier in which the inefficiency term is modelled as a linear function of the capital ratio and of the non-core ratio. The underlying hypothesis is that the efficiency of the banking system is guided by its degree of solvency and stability (capital ratio and non-core ratio, respectively). Finally, in order to verify the existence and stability of a long-term relationship between banking efficiency and capital ratio and non-core-ratio, we implement ARDL estimation. In so doing, we verify whether solvency and stability are two important factors in determining the efficiency of the Italian banking system in the long run. We show that the efficiency of the banking system is influenced negatively by the non-core ratio and positively by the capital ratio, respectively. Finally, only the non-core ratio influences the efficiency of the Italian banking system in the long run.