Cost Efficiency of Italian Commercial Banks:A Stochastic Frontier Analysis

Alessio Fontani,Luca Vitali

doi:10.13189/ujibm.2014.020304

Abstract

During 90’s, the Italian banking system faced a new competitive environment both widening the dimensional scale and pursuing a rationalization process. Some insights could be drawn through efficiency analysis by estimation of a stochastic cost frontier for the period 1993-2004. Benchmark analysis not only highlights the contribution of the main factors that affect efficiency, but also allows evaluation of efficiency dynamics through time, determining the existence of technical progress and scale economies. However, such measure is significant if the sample of firms is homogeneous hence, accounting for heterogeneity of the units involved is then a goal of our analysis.

Highlights

At the beginning of 90’s, Italy adopted the Second EEC Banking Directive (89/646/EEC) on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions
This paper aims at investigating the performance of the Italian banking system from 1993 to 2004, determining the contribution of the main factors that characterize banks efficiency
The parametric methodology of Stochastic Frontier Analysis (SFA), Cost Efficiency of Italian Commercial Banks: A Stochastic Frontier Analysis introduced by Aigner, Lovell and Schmidt (1977) and Meeusen and Van den Broeck (1977) and extended by Kumbhakar and Knox Lovell (2000) leads to a best-practice frontier, by comparison of performances of all units of the economic system; such methodology allows discrimination between the effect caused by stochastic disturbances or by technical inefficiency, which can simultaneously characterize the deviations from the best-practice frontier

Summary

Introduction

At the beginning of 90’s, Italy adopted the Second EEC Banking Directive (89/646/EEC) on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions. The parametric methodology of Stochastic Frontier Analysis (SFA), Cost Efficiency of Italian Commercial Banks: A Stochastic Frontier Analysis introduced by Aigner, Lovell and Schmidt (1977) and Meeusen and Van den Broeck (1977) and extended by Kumbhakar and Knox Lovell (2000) leads to a (stochastic) best-practice frontier, by comparison of performances of all units of the economic system; such methodology allows discrimination between the effect caused by stochastic disturbances or by technical inefficiency, which can simultaneously characterize the deviations from the best-practice frontier Such parametric approach implies some restrictions as well, by imposing a specific functional form to the error distribution and requiring ad hoc hypothesis on the efficiency component distribution.

Benchmark Analysis through Panel Data and Heterogeneity Impact on Efficiency

Time-variability of efficiency

Findings

Concluding Remarks