Cost efficiency in the Latin American and Caribbean banking systems

Abstract

A common cost frontier with country-specific environmental variables was estimated for a panel of 481 banks from 16 Latin American countries. A stochastic frontier model was used to estimate cost inefficiency and scale and scope economies. The results suggest that there is a wide range of inefficiency levels across countries. Very small and very large banks are significantly more inefficient than large banks. Underperforming banks tend to be smaller, to be undercapitalized, to present a poor profit performance, to be more dependent on non-interest income, to be more risky, to have a less stable deposit base and to intermediate less.