Abstract
AbstractThis paper studies the relative performance of domestic and foreign banks in the Latin American and Caribbean banking industry. Data Envelopment Analysis is used to compute technical efficiency scores for the years 2001 and 2013. Our main contribution is twofold. On the one hand, we assess performance at the level of the management of specific production factors. On the other hand, we distinguish program efficiency from managerial efficiency, which allows us to evaluate whether the differences in technical efficiency between national and foreign banks are due to the use of different technologies (program efficiency) or, conversely, differences in the managerial capacities of managers in both categories of banks (managerial efficiency). The results show that foreign banks are more efficient than domestic ones, and provide evidence that the greater efficiency of foreign banks is mostly due to the superior technology they use.
Highlights
It is well known that the Latin American and Caribbean (LAC) countries began to overhaul their banking systems from the mid-1990s onwards, in order to adapt them to international solvency standards, liberalize their operational capacity, open them to international competition, and increase their levels of efficiency and productivity (De Carvalho, De Paula, & Williams, 2015)
Using the characterization of the technology in the banking industry described in Section 4.1, we have assessed the performance of the LAC banks in the years 2001 and 2013 separately
A first conclusion from our results is that, from a technical point of view, foreign banks in the LAC banking industry are more efficiently managed than their domestic counterparts
Summary
It is well known that the Latin American and Caribbean (LAC) countries began to overhaul their banking systems from the mid-1990s onwards, in order to adapt them to international solvency standards, liberalize their operational capacity, open them to international competition, and increase their levels of efficiency and productivity (De Carvalho, De Paula, & Williams, 2015). Advocates of the introduction of foreign banks argue that increased competition in local markets leads to improvements in the operational efficiency of domestic entities in a number of different ways, i.e. the implementation of more modern technologies, and the development of new products and services lead to reduced margins and lower costs for financial services (CEPAL, 2012) They argue that foreign banks tend to act more cautiously than their domestic counterparts and they boost economic growth by improving resource allocation efficiency as well as making the sector less vulnerable to internal and external disturbances (Olivero, Li, & Jeon, 2011). We investigate the relative efficiency of the production technologies used by foreign and domestic banks
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