Efficiency across alternative financial structures, bank types and size classes: a comparison of the OECD countries

Abstract

This paper investigates the impact of alternative financial and banking structures on banks' overall efficiency. The effect of size on the estimated banking efficiency is also examined. These issues are addressed by first measuring the cost efficiencies over 1998?2003 for a sample of commercial, savings and cooperative banking institutions across bank- and market-based countries that operate in 21 Organisation for Economic Co-operation and Development (OECD) countries. Then, in order to examine not only the cost side but the overall efficiency of the sampled banks, we assess the importance of various aspects of profitability. Finally, the inefficiency measures are related to several explanatory variables, including bank-specific and financial structure characteristics. Our results suggest that there is only weak evidence to support the hypothesis that private commercial banks have cost efficiency and profitability advantages over their mutual cooperative and savings counterparts. Moreover, in market-based systems very large commercial banks tend to be more efficient and profitable than their smaller counterparts, whereas the opposite is true in bank-based systems. Finally, the results from our pooled logistic regression broadly suggest that after controlling for the level of financial development, a more market-based financial structure will likely lead to greater cost efficiency.