Abstract
PurposeThe paper aims to enrich previous findings for an emerging banking industry such as Vietnam, reporting the difference between the parametric and nonparametric methods when measuring cost efficiency. The purpose of the study is to assess the consistency in issuing policies to improve the cost efficiency of Vietnamese commercial banks.Design/methodology/approachThe cost efficiency of banks is assessed through the data envelopment analysis (DEA) and the stochastic frontier analysis (SFA). Next, five tests are conducted in succession to analyze the differences in cost efficiency measured by these two methods, including the distribution, the rankings, the identification of the best and worst banks, the time consistency and the determinants of efficiency frontier. The data are collected from the annual financial statements of Vietnamese banks during 2005–2017.FindingsThe results show that the cost efficiency obtained under the SFA models is more consistent than under the DEA models. However, the DEA-based efficiency scores are more similar in ranking order and stability over time. The inconsistency in efficiency characteristics under two different methods reminds policy makers and bank administrators to compare and select the appropriate efficiency frontier measure for each stage and specific economic conditions.Originality/valueThis paper shows the need to control for heterogeneity over banking groups and time as well as for random noise and outliers when measuring the cost efficiency.
Highlights
The efficiency of the banking industry has always been of particular concern to policymakers and researchers all over the world as banks play an extremely important role in the development prospects of each nation
The study is conducted to compare the cost efficiency of Vietnamese commercial banks by the data envelopment analysis (DEA) and stochastic frontier analysis (SFA) methods to assess the similarity in the issuance of policies
The results show that the SFA models estimate higher efficiency scores and less significant variability than the DEA models
Summary
The efficiency of the banking industry has always been of particular concern to policymakers and researchers all over the world as banks play an extremely important role in the development prospects of each nation. Based on this, using the same set of data, the research is conducted to measure the efficiency of Vietnamese commercial banks in two different methods including the stochastic frontier analysis (SFA) and the data envelopment analysis (DEA). These are the two most commonly used efficient frontier measures in bank efficiency studies. The results of the two methods will be analyzed and compared to make the most appropriate comments
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