Cost Efficiency Of Banks Research Articles

The impact of ESG on the cost efficiency of commercial banks—Evidence from Western European commercial banks

AbstractThis study examines the impact of Environmental (E), Social (S), and Governance (G) activities on the cost efficiency of commercial banks in Western Europe in 2010–2020. The stochastic frontier analysis (SFA) method was employed to investigate the impact of E, S, G, and bank characteristic variables on cost efficiency. The findings reveal that commercial banks can improve their cost efficiency by conducting E, S, and G activities. Banks that implemented these practices tended to have relatively better cost efficiency than those that did not. Overall, the results of this study are consistent with the stakeholder hypothesis and present the first evidence of the interplay between cost efficiency and ESG activities in the banking industry in Western Europe.

Bank cost efficiency and credit market structure under a volatile exchange rate

We study the impact of exchange rate volatility on cost efficiency and market structure in a cross-section of banks that have non-trivial exposures to foreign currency (FX) operations. We use unique data on quarterly revaluations of FX assets and liabilities (Revals) that Russian banks were reporting between 2004 Q1 and 2020 Q2. First, we document that Revals constitute the largest part of the banks’ total costs, 26.5% on average, with considerable variation across banks. Second, we find that stochastic estimates of cost efficiency are both severely downward biased – by 30% on average – and generally not rank preserving when Revals are ignored, except for the tails, as our nonparametric copulas reveal. To ensure generalizability to other emerging market economies, we suggest a two-stage approach that does not rely on Revals but is able to shrink the downward bias in cost efficiency estimates by two-thirds. Third, we show that Revals are triggered by the mismatch in the banks’ FX operations, which, in turn, is driven by household FX deposits and the instability of Ruble’s exchange rate. Fourth, we find that the failure to account for Revals leads to the erroneous conclusion that the credit market is inefficient, which is driven by the upper quartile of the banks’ distribution by total assets. Revals have considerable negative implications for financial stability which can be attenuated by the cross-border diversification of bank assets.

Bank cost efficiency and underground economy: The asymmetric impact of cooperative and non-cooperative banks

We build a model of firms' choice between regular and irregular labor factors which links the cost efficiency of banks to the size of the underground economy. We consider two kinds of credit institutions supplying loans to the firms, cooperative and non-cooperative banks. The theoretical results show that cost-efficiency encourages firms to hire more regular workers. We then test our theoretical predictions using regional data for Italy over the 2004–2017 and assess how the efficiency of cooperative and non-cooperative banks, shapes the underground economy. In line with our theoretical prediction, increased cost efficiency reduces the size of the underground economy, especially in building and agriculture, and the estimated coefficients for the different types of banks are quite similar in size. Our evidence is robust to banks’ size, once we control for the likely simultaneity between cost efficiency and the underground economy and once we include the quality of institutions.

Piercing through the haze: Did PPP increase versus decrease bank efficiency?

AbstractWe study profit and cost efficiency effects of the Paycheck Protection Program (PPP) for US banks that disbursed the funds. Using bank‐level data combined with PPP bailout data and instrumental variables and other techniques for identification, our findings suggest that more intense PPP lending boosted bank profit efficiency but decreased cost efficiency. We uncover channels for profit efficiency improvements through higher revenues from core deposits and lending, and a labour‐related channel for the decline in bank cost efficiency from hiring more employees and significantly increasing compensation expenses. Findings are robust to many checks and may have important implications for bank management and future government bailout policy design.

Ứng dụng Fintech và hiệu quả hoạt động của ngân hàng: Bằng chứng thực nghiệm từ các ngân hàng Việt Nam

The objective of the study is to evaluate the impact of Fintech on bank efficiency using comprehensive methods to effectively measure the level of Fintech application within the banks (Bank Fintech) and bank cost efficiency through a research sample of 32 Vietnamese banks in the period 2018- 2022. The research findings show that the level of bank Fintech has a positive effect on the bank's cost efficiency and this effect will be stronger after the Covid pandemic and for unlisted banks. The research findings also highlight strategic suggestions for banks on the path to finding the most relevant Fintech investment models aligned with the economic context and the banks’ competitive advantages

How consistent are measures of financial liberalization in assessing its impact on bank cost efficiency? A cross–country empirical analysis

AbstractUsing a sample of commercial bank–year observations covering 104 countries over the 1999–2017 period, we consider five contemporary de jure and de facto indicators of financial liberalization to provide a comparative assessment of their impact on bank cost efficiency. With the sole exception of one de jure index, all other financial liberalization measures consistently indicate an improvement in cost efficiency. We also compare the effects before and after the 2007 global financial crisis, which instigated a policy shift from deregulation to prudential re–regulation. We find that prudential re–regulation did not detrimentally affect bank cost efficiency. Our results for the main financial liberalization measures hold irrespective of countries’ stage of economic development and prove robust to re–estimations based on a single-country efficiency frontier for the US, alternative model specifications and methodologies that account for endogeneity and cross section dependence. The key policy implication from our findings is that prudential policies aimed at fostering stability and less bank risk–taking, can be pursued without any risks of hindering financial intermediation and lowering bank cost efficiency.

The interaction between corruption, bank cost efficiency and economic development in Italy

In this paper, we assess the interaction between corruption, bank cost efficiency, and economic development. Existing literature on the subject normally focuses separately on the link between corruption, financial development, and growth, and finds ambiguous results, not distinguishing between different types of credit institutions. We use Italian disaggregated data from 2004 to 2012, considering cooperative and non-cooperative banks, to determine whether controlling corruption affects banks’ cost efficiency in Italian provinces and promotes economic development. Utilizing a panel autoregressive model, we find that controlling corruption magnifies the positive impact of banks’ cost efficiency on economic development. Evidence of a positive effect of the interaction is observed, particularly in the case of non-cooperative banks and for higher values of the Control of Corruption Index.

Income and balance sheet diversification effects on banks' cost and profit efficiency: Evidence from the United States

AbstractUsing two‐step system generalized method of moments approach, we provide empirical evidence on the impact of income, asset, and funding diversification on the cost and profit efficiency of US commercial banks from 2002 to 2019. Furthermore, we use two‐stage least squares to examine the interdependence between cost efficiency and profit efficiency. Our results show that funding and income (assets) diversification has a positive (detrimental) effect on the cost efficiency of banks, whereas funding (income and assets) diversification has a significantly negative (positive) effect on profit efficiency. Our findings reveal that during the global financial crisis, asset diversification is not beneficial for banks, whereas funding ‎diversification has a positive effect on cost and profit efficiency.‎ Our results confirm bidirectional causality between cost and profit efficiency in US commercial banks. Our mixed results on the influence of income, asset, and funding diversification on the cost and profit efficiency of banks with varying characteristics have useful implications for policymakers and regulators‎.

The effect of banks’ cost efficiency and competition on liquidity creation

This study examines the role of a bank’s cost efficiency and competition when creating liquidity. It also investigates the different abilities to create liquidity between conventional banks and Islamic banks. This study employs data from annual reports for 117 banks, including 103 conventional banks and 14 Islamic banks from the Association of Southeast Asian Nations 4 (ASEAN-4). Using the dynamic panel regression with the GMM system, this study finds that cost-efficient banks have a higher ability to create liquidity, while high banking competition deteriorates that ability. However, these effects decrease as banks manage their costs more efficiently. The findings imply that banks’ ability to create liquidity is impacted by their market power to win the competition. Additionally, this study found that Islamic banks create more liquidity than conventional banks. This phenomenon indicates that by being more focused on activities using on-balance sheet items, Islamic banks are spared from risky off-balance sheet commitments. Furthermore, efficient banks are more able to generate liquidity in competitive markets.

Profit Efficiency and The Influence of Financial Performance Measures on Cost Efficiency of Rural Banks in Indonesia

Profit Efficiency and The Influence of Financial Performance Measures on Cost Efficiency of Rural Banks in Indonesia

Cost efficiency of Chinese banks: Evidence from DEA and MLP-SSRP analysis

Our study contributes to the empirical literature in two ways: 1) We propose an innovative Data Envelopment Analysis (DEA) model to estimate the cost efficiency of Chinese banks; 2) We propose a Stochastic Structural Relationship Programming (SSRP) Model based on neural networks to evaluate the interrelationships between efficiency and other bank-specific variables. The findings show that Chinese commercial banks experienced a gradual increase in the level of efficiency from 2010 up to 2015, after which the efficiency level experienced slight volatility and, by the end of 2018, ended up with an efficiency score of 0.746 on a scale of 0 to 1. We find that for banks with lower levels of efficiency, improvement in the efficiency level has a favorable effect on profitability, and these banks will also focus their business on traditional banking activities. Banks with higher levels of efficiency need to find alternative, profitable banking businesses in order to sustain their higher level of efficiency.

Evaluation of Digital Banking Efficiency in Indonesian Banking Sector using Data Envelopment Analysis (DEA) Approach

The digital banking industry in Indonesia has experienced significant growth, driven by changing customer demands, technological advancements, and regulatory support. The digitalization of Indonesian banks aims to enhance cost efficiency. This research utilizes the Data Envelopment Analysis (DEA) method to measure the cost efficiency of Indonesian commercial banks. The research includes digital banks as business units and neo-banks, comparing their cost efficiency from 2012 to 2020, with digital banks and neo-banks generally operating more efficiently than non-digital banks. The findings highlight the significant impact of digital transformation on cost efficiency in the banking industry. Stakeholders, including banks and financial authorities, can utilize these insights to plan strategies, reduce operating costs, and enhance cost efficiency. Further research can explore additional factors, such as macroeconomic influences, and categorize commercial banks based on their core capital categories.

Assessing the Cost Efficiency of Commercial Banks in Nepal: An Empirical Analysis

This paper examines the cost efficiency and its determinants for Nepalese commercial banks by using semi-parametric methodology. We first estimate the efficiency and growth of productivity using Data Envelopment Analysis and then identify firm-specific attributes that potentially explain cost efficiencies. The first-stage results indicate a considerable level of cost inefficiency, which is largely caused by technical inefficiency. Additionally, there exists a low level of external (particularly regulatory) influence on the input mix, as indicated by a very low level of allocative inefficiency. The growth in productivity is low and even negative, mostly resulting from a lack of technological progress. The second-stage results indicate that state-owned banks are less cost-efficient than private banks (domestic and foreign), and size has a consistently inverse impact on cost efficiency. Banks with higher financial capital, larger loan ratios, and higher profits tend to be more cost efficient; however, banks with higher credit risk tend to be less cost efficient. Our findings have implications for policymakers, regulators, and bank managers as a better understanding of the level and sources of bank efficiency helps reduce inefficiencies, formulate regulations to enhance the overall efficiency of the banking system, and develop policies to promote competition and financial stability.

Indonesia Islamic Financial Institution's Cost efficiency and Welfare Performance : Evidence from Economic's Recovering Country

Purpose – The study examines the relationship between the consequential social cost of market power (i.e., welfare performance of banks) and cost efficiency using data covering the period 2009 to 2017 in both private own Islamic banks and state owned Islamic Banks in Indonesia.
 Design/methodology/approach – The study adopts the Ordinary Least Squares (OLS), Fixed Effect (FE) panel regression and the Quantile regression (QR) approaches to control for heterogeneity and provide increased room for policy relevance. The Two-Stage Least Squares Instrumental Variables (2SLS-IV) regression is used to ensure the robustness of the findings against the problem of possible reverse causality.
 Findings – The results indicate a positive relationship between banks’ welfare performance and cost efficiency, which suggests that greater cost efficiency hedges welfare losses. In other words, welfare gains and cost-efficient banks are not mutually exclusive. Also, the results show evidence that the sensitivity of welfare gain to cost efficiency depends on the knowledge of local market dynamics. Further, the findings from the QR estimation suggest that, but for welfare loss at low (Q.25) to the median (Q.50) quantiles, cost efficiency is a necessary and sufficient condition to hedge the welfare losses.

Measuring the Cost Efficiency of Lebanese Commercial Banks using the Stochastic Frontier Approach

Abstract This paper attempts to measure the cost efficiency of 44 banks operating in Lebanon throughout the period 1992-2016, using the stochastic frontier technique. The additional purpose of this study is to detect the impact of some endogenous and exogenous factors on the cost efficiency scores calculated. The empirical results show a stabilization in the cost efficiency of Lebanese banks over the period studied and that on average those banks could reduce up to 12% of their allocated resources while maintaining the same level of their final outputs. We also found that cost efficiency among Lebanese banks is driven by 1) macroeconomic factors such as economic growth and inflation development and 2) by banks specific factors such as liquidity, capitalization, profitability and the diversification strategy. JEL classification numbers: C10, C67, D61, G20, G21. Keywords: Stochastic frontier, Parametric approach, Cost efficiency, Banks, Efficiency determinants.

Spatial competition on rural bank efficiency: Evidence from Indonesia

This study empirically examines bank spatial competition within the rural banking setting of Indonesia. The specific focus is on bank cost efficiency. It presents a new competition measure based on two spatial variables: physical distances and Thiessen polygon market boundaries. This study uses panel data from a large sample of more than 1,000 rural banks using quarterly financial data of rural banks in Indonesia from Q1–2014 to Q4–2018. Parametric or stochastic frontier analysis of Model EN is used to handle the endogeneity in bank cost efficiency measurement. The results show that bank efficiency is higher for shorter distances between banks and larger boundaries. Overall, the results support the competition-efficiency hypothesis. It also helps the idea that banks have mark-up pricing (higher market power) and may choose to reduce their effort to maximize profit.

Islamic bank efficiency: an efficiency method with SFA

Judging from the financial ratios, the performance of Islamic banking in Indonesia was remarkably stable both before and during the Covid-19 pandemic. However, another thing is whether this condition could make Islamic banks continue to work effectively. This study aimed to measure the cost efficiency of Islamic commercial banks in Indonesia quarter I of 2019 – quarter IV of 2020 and analyze the influencing factors in cost efficiency. The study used a saturated sampling technique with a total sample of 14 Islamic commercial banks, while the efficiency level was determined using the Stochastic Frontier Analysis (SFA) method. It turns out that PT. Bank Muamalat Indonesia Tbk. has the highest efficiency value of 0.9284. Several banks with an efficiency value of more than 0.5 are PT. Bank Aceh Syariah, PT. Bank BNI Syariah, and PT. Bank Mega Syariah. In this study, only inflation variables affect efficiency. In contrast, bank size, Return on Assets (ROA), Net Operating Margin (NOM), Non-Performing Financing (NPF), Financing to Deposit Ratio (FDR) variables, Capital Adequacy Ratio (CAR), Gross Domestic Product (GDP), and the rupiah exchange rate don’t affect the efficiency. Overall, all the company's internal variables and environmental variables affect efficiency.

Demographic and Socio-Economic Factors as Barriers to Robo-Advisory Acceptance in Poland

Theoretical background: One manifestation of the use of artificial intelligence technology in financial services is robo-advisory. Automated assistants are used in the area of communication with consumers and the sale of financial products. The development of robo-advisory services may contribute to increasing the availability of financial services and the cost efficiency of banks’ operations. So far, however, robo-advisory has not been widely used in bank services, and the reasons for this can be seen in the lack of wide acceptance of robo-advisory by bank customers, among other things. Purpose of the article: The aim of this paper is to identify barriers to the acceptance of robo-advisory in the services of banks operating in Poland. Variables relating to the demographic and socio-economic characteristics of consumers were analysed. Knowledge in this area can provide banks with a practical guideline for activities aimed at increasing acceptance of artificial intelligence technology and wider use of robo-advisory in financial services. Research methods: The paper uses the results of a survey conducted in October 2020 regarding the application of artificial intelligence technology in the banking sector in Poland. The survey included a representative sample of 911 Polish citizens aged 18–65. A multinomial logit model was employed to identify variables that represent significant barriers to robo-advisory acceptance in financial services. Main findings: The conducted research helped identify the barriers to acceptance of robo-advisory among consumers in Poland. A low propensity to use robo-advisory in bank services is characteristic of respondents from older age groups, as well as those who do not show a predilection for testing new technological solutions. Lack of experience in using investment advisory services and customer concerns about the misuse of personal data by banks are also significant barriers.

Cost-efficiency and bank profitability during health crisis

ABSTRACT This paper examines the impact of cost-efficiency on bank profitability in the context of the Covid-19 pandemic using quarterly data from a panel of banks operating in five (5) Sub-Saharan African countries. The findings show that cost-efficient banks are more profitable amid the pandemic. Additionally, we found that revenue diversification is associated with strong financial performance. Our findings contribute to literature by proposing the adoption of aggressive cost control and revenue diversification strategies by the management of banks to ensure sustainable and resilient financial performance in times of crises when interest incomes are sticky.

The role of local institutions in cooperative banks’ efficiency. The case of Italy

A large body of literature investigates various sources of bank efficiency. Nonetheless, little empirical evidence is available on the role played by institutional quality. Further, the extant research neglects the relevance of local institutions, which should be particularly important for local banks. To fill this lacuna, this paper investigates the relationship between local institutional quality and the cost-efficiency of Italian cooperative banks. Applying Stochastic Frontier Analysis to data spanning the years from 2006 to 2015, we find that better institutions – and especially control of corruption – are associated with improvements in bank cost efficiency. This evidence suggests important implications for the definition of suitable strategies aimed at controlling corruption and improving law enforcement at the local level, to decrease bank operating costs and mitigate moral hazard problems jeopardising managers’ incentives.