Cost and Profit Efficiency of the Turkish Banking Industry: An Empirical Investigation

Abstract

By employing a stochastic frontier approach, we examine the effect of bank size, corporate control, and governance, as well as ownership, on the cost (input) and alternative profit (input‐output) efficiencies of Turkish banks. We find that the average profit efficiency is 84% for Turkish banks. The oligopolistic nature of the Turkish banking industry has contributed to less than optimal competition in the loan market and deposit markets. Our results indicate that the degree of linkage between cost and profit efficiency is significantly low. This suggests that high profit efficiency does not require greater cost efficiency in Turkey, and that cost inefficient banks can continue to survive in this imperfect market, where profit opportunities are abundant for all types and sizes of banks. Accordingly, our results indicate that the different sizes of banks have capitalized these opportunities equivalently.