Cost Efficiency Of Banks Research Articles

Freedom, competition and bank efficiency in Sub-Saharan Africa

PurposeThis study aims to consider the effect of financial (banking) freedom and competition on bank efficiency.Design/methodology/approachWith data from 11 Sub-Saharan African countries over the period 2006-2012, the study estimates both competition (market power) and bank cost efficiency using the same stochastic frontier framework. Subsequently, Tobit models, including instrumental variable Tobit regression, are used to assess how financial freedom affects the relationship between competition and bank efficiency.FindingsThe results show that increase in market power (less competition) leads to greater bank cost efficiency, but the effect is weaker with higher levels of financial freedom. This is not consistent with the quiet life hypothesis.Practical implicationsPolicymakers usually take the view that opening up banking markets to greater competition may lead to higher efficiency. However, the results have shown that allowing banks to maintain some level of market power may be necessary to ensure banking system efficiency.Originality/valueThis study deepens the understanding of the inconsistent relationship between competition and bank efficiency, by using the same framework to measure both competition and efficiency, and by providing new empirical evidence on how the level of financial freedom affects this relationship.

Bank branches expansion, efficiency and local economic growth

ABSTRACTThis study investigates the effects of branch network expansion and geographical strategies on the cost efficiency of Italian cooperative banks between 2006 and 2013. Results indicate that, except for banks with a more diversified product offering, expansion has a negative impact on efficiency, which is exacerbated by increased distance between the headquarters and branches. Any positive effect due to a larger bank size is neutralized by the branch expansion. Efficient local banks and a larger credit availability boost the local economy, while a bank structural change by a branch expansion generates a negative effect in terms of local economic development.

THE EFFECTS OF COMPETITION ON EFFICIENCY: THE VIETNAMESE BANKING INDUSTRY EXPERIENCE

Given considerable changes in the Vietnamese banking environment brought about by significant reforms towards liberalization during the last two decades, this study investigates the evolution of competition and efficiency, compares the competition and efficiency of state-owned banks to joint-stock banks, and then tests the “quiet life” hypothesis in this industry over the period 2000–2014. This study employs the efficiency-adjusted Lerner index (i.e., market power) to capture competition, and the cost efficiency estimated by a Fourier-flexible function stochastic frontier analysis (SFA) to capture bank efficiency. This study firstly finds a slight improvement of competition and cost efficiency in the Vietnamese banking sector over the analysis period. Secondly, there are no significant differences in competition and cost efficiency level between state-owned and joint-stock banks. Thirdly, a positive causality running from competition to cost efficiency is documented, providing evidence of supporting the “quiet life” hypothesis. Finally, positive efficiency effects of the banks’ capital ratio and size are found, while insignificant impacts of the growth of GDP per capita and 2007 global financial crisis were observed. The results are strongly robust to a variety of tests. The findings suggest pro-competition, pro-capitalization and pro-size expansion policies in the Vietnamese banking sector if targeting at improving the cost efficiency of Vietnamese banks.

Efficiency and Competition in the Malaysian Banking Market: Foreign versus Domestic Banks

The aim of this paper is to investigate efficiency performance of Malaysian banking market using data envelopment analysis approach in the context of the increasing presence of foreign banks. Specifically, two measures of efficiency are constructed, cost and profit efficiency by utilizing bank-level data of Malaysian commercial banks, over the period 2003 to 2014. The results obtained show the domestic banks are more efficient than the foreign banks counterparts for both measures of efficiency. Next, the Lerner Index approach is employed to measure competition and finally, Granger causality tests are undertaken to answer the question, does competition foster efficiency? The results of causality tests support a positive effect of competition on cost and profit efficiency of Malaysian banks. With regard to the financial liberalization, the findings imply that higher competitive pressure may be offset the market power of individual banks; however, eventually it will results in efficiency gains of Malaysian banks.

What drives bank efficiency? The interaction of bank income diversification and ownership

This paper examines the relation between income diversification and bank efficiency across 83 countries over the period 2003–2012. We also evaluate how ownership structure affects the impact of bank diversification on cost efficiency. Using a stochastic frontier approach to estimate bank cost efficiency, we find evidence that increased diversification tends to improve bank efficiency but the benefits of diversification are offset by the increased exposure to volatile non-interest activities. With respect to the impact of ownership, we find that state-owned banks with fewer volatile income sources are likely to be less efficient in terms of income diversification. Our results also reveal that more diversified foreign-owned banks tend to be less efficient in developed countries, while the increased foreign ownership of banks appears to improve the diversification benefits in developing countries after the financial crisis. Our findings highlight the implications of bank income diversification and ownership for efficiency and are relevant to bank regulators who are considering additional regulations on bank management.

Cost efficiency in Bangladesh banking: does financial reform matter?

ABSTRACTThis article estimates the cost efficiency of the commercial banks of Bangladesh in the context of financial reform. Employing the single-stage stochastic frontier analysis (SFA) model, the study uses a unique balanced panel data set comprising bank-level annual data from the dominant commercial banks in Bangladesh for the period 1983–2012. The results show that bank cost has fallen due to financial deregulation. Our results from the data envelopment analysis do not vary significantly that we obtained from the SFA. In addition, the presence of politically linked directors on the bank board has an adverse effect on efficiency. These findings suggest that further reforms aiming at removing all sorts of political influence should continue to ensure competitive environment in order to achieve cost efficiency in the financial sector of the country.

Interrelationship Among Basel Capital Regulation, Risk, and Efficiency in Pakistani Commercial Banks

This study examines the interrelationship among Basel capital regulations, risk, and efficiency of Pakistani commercial banks from 1997-2015. It uses the Generalized Method of Moments (GMM) technique from beginning of capital regulation in 1997 to 2015. We find that bank capital regulation reduces the bank risk. As far as the impact of capital regulation on bank efficiency is concerned, it reduces the bank efficiency. Our results also indicate that the effect of capital regulation on bank risk and cost efficiency is different for each of the Basel accords. Moreover, Basel II was more successful than Basel I in reducing the risk taken by banks, while its impact on the cost efficiency of banks was negligible.

Regulatory Impact of Bank Performance in Nigeria: Application of Stochastic Frontier Analysis

This study employs a panel dataset on the cost efficiency of Nigerian commercial banks to test the hypothesis whether internal regulation from the monetary authority affects the performance of commercial banks. The empirical work is carried out through the use of stochastic frontier analysis on 14 commercial banks over 10 years. The study finds that regulation has a negative and significant influence on the total cost while bank output, input prices and bank size have a positive and significant effect. This implies that the large the bank size, the higher total cost incurred.

ANALISIS PENGARUH KREDIT MACET DAN KECUKUPAN LIKUIDITAS TERHADAP EFISIENSI BIAYA OPERASIONAL BANK UMUM SYARIAH DI INDONESIA

Expense efficiency is one of the ways to gain a bigger profit. Profit, as a component of financial performance measures, indicates the management capability in handling finance issues, such as operational expenses. This study discusses the operational expenses efficiencies related to bad credit or financing problems and liquidity adequacy. The results of this study show that Non Performing Financing (NPF) significantly affects the operational cost efficiency of Islamic Banks in Indonesia as much as 40.2%. It means that in the event of Non Performing Financing (NPF), operational expenses is expected to be inefficient because a significant part of the expenses would be allocated for backup or to erase productive assets collectability. Meanwhile, the liquidity adequacy does not significantly affect the efficiency of the operational expenses. Simultaneously, both of these variables have an important role in the financial performance since they give an overview of their role in the operating expenses efficiency by 20.8%.

Breaking up big banks

This paper discusses the proposals to limit the size of the banks, also known as tackling the banks’ incentives to become “too big to fail”. I examine how regulations to curb bank size may affect banks’ operating costs. I analyze the relationship between the size of U.S. bank holding companies (BHCs) and their operating costs from 2001:Q2 to 2014:Q1. I find that rules to limit the size of banks could significantly reduce economies of scale. In particular, if large and cost-efficient banks become split into smaller parts, data processing, legal fees, audit and consulting expenses, expenses on premises are likely to increase.The second part of the paper deals with the phenomenon known as “too big to jail” and examines banks’ settlements. I compile a novel dataset on 341 litigation charges and settlements and find evidence that larger banks and banks with a higher credit risk, but not necessarily more systemically risky banks, face litigation charges more frequently. I do however observe that penalties had little effect on BHCs’ profitability, and that some of the largest banks continuously faced litigation charges which may imply that benefits from wrongdoing outweighed the costs or that many large banks relied on the fact they will be considered immune from prosecution due to their sheer size and their influence on the economy.

Bank ownership and cost efficiency: New empirical evidence from Russia

This paper investigates the cost efficiency of Russian banks with regard to their heterogeneity in terms of ownership form, capitalization and asset structure. Using bank-level quarterly data over the period 2005–2013, we perform stochastic frontier analysis (SFA) and compute cost efficiency scores at the bank and bank group levels. We deduct from gross costs the negative revaluations of foreign currency items generated by official exchange rate dynamics rather than by managerial decisions. The results indicate that the core state banks, as distinct from other state-controlled banks, were nearly as efficient as private domestic banks during and after the crisis of 2008–2009. Foreign banks appear to be the least efficient market participants in terms of costs, which might reflect their lower (and decreasing over time) penetration of the Russian banking system. We further document that the group ranking by cost efficiency is not permanent over time and depends on the observed differences in bank capitalization and asset structure. We find that foreign banks gain cost efficiency when they lend more to the economy. Core state banks, conversely, lead in terms of cost efficiency when they lend less to the economy, which can result from political interference in their lending decisions in favor of unprofitable projects Private domestic banks that maintain a lower capitalization significantly outperform foreign banks and do not differ from the core state banks in this respect.

Measuring efficiency of Vietnamese banks

PurposeThis paper aims to examine alternative methods for treating nonperforming loans (NPLs) in bank cost-efficiency studies using stochastic frontier analysis (SFA).Design/methodology/approachThe authors consider three methods of treating NPLs in SFA: as an additional control variable, as an environmental factor or as a deduction from total loans. Using data from the Vietnamese banking system (2003-2010), the authors then compare these results with those of the base model (where total loans is used regardless of the NPLs) to see which one is more appropriate for this study.FindingsThe authors observed that the first two methods are inappropriate for the analysis: one cannot find the significant relationship between NPLs and the banks’ total cost, and the other cannot account for any inefficiency at all. The authors suggested that the third method of separating NPLs from total loans can provide better insights. Using the proposed method, the authors showed that the cost-efficiency of Vietnamese banks over the period examined was moderate with a slight decreasing trend. When NPLs are separated, the cost-efficiency decreases in state-owned banks and big banks, whereas it increases in small and private banks.Research limitations/implicationsResearch is limited to Vietnamese banks during a certain period, and it would be useful to apply the same technique to other data sets.Practical implicationsThe paper suggests a new approach to account for NPLs in cost SFA studies in banking.Originality/valueThe paper provides a much more searching analysis of NPLs in banking than has generally been seen in previous research.

Determinants of bank efficiency in Turkey: Participation banks versus conventional banks

This study examines the technical, allocative, and cost efficiency of conventional and participation banks in Turkey with data envelopment analysis (DEA) method. In the wake of finding technical, allocative, and cost efficiency results by DEA intermediation approach, Tobit regression analysis is used to determine the factors influencing the efficiency. The main purpose of this paper is analyzing efficiency of the banking system in Turkey and compare the efficiency of participation banks and conventional banks. The results of DEA indicate that average participation bank efficiency is higher than the average conventional bank efficiency each year. Regarding Tobit regression analysis, while expenses and loan quality have a significantly negative relationship with efficiency of conventional banks, they have a significantly positive relationship with the efficiency of participation banks. While the total loans have a significantly positive relationship, external variables have a significantly negative relationship with efficiency of both types of the banks.

Economies of scale, technical change and persistent and time-varying cost efficiency in Indian banking: Do ownership, regulation and heterogeneity matter?

Banks with different ownership types adjust differently to changes in regulatory environments. Although this topic has been widely studied, all the previous studies fail to control for bank-heterogeneity (bank-specific effects) in estimating cost structure and efficiency. We propose a model where we control for bank-heterogeneity, and introduce persistent and time-varying inefficiency. Additionally we incorporate determinants of both persistent and time-varying inefficiency as well as production risks. Furthermore, our model allows estimation of different technologies for different ownership types jointly. We use this model to analyze the effect of regulation in Indian banking. We find that private banks have not exhausted their economies of scale, foreign banks are operating under diseconomies of scale, especially after the reforms, and scale economies of state owned banks are unaffected by regulation. Banks of all ownership types have enjoyed technical progress; however, foreign banks have benefited the most, followed by state owned banks. Only state banks were able to improve their cost efficiency, while private banks, and especially foreign banks, were lagging behind their cost frontiers.

Joint estimation of the Lerner index and cost efficiency using copula methods

This paper deals with the estimation of market power, measured by the Lerner index, and cost efficiency at the bank level, using the stochastic frontier (SF) methodology. Both market power and cost efficiency are estimated jointly in a single step. We use the copula method to incorporate dependence between market power and cost efficiency. In contrast to earlier works that used a two-step approach, the SF approach used herein estimates a bank-specific nonnegative Lerner index free from random shocks. We showcase the advantages of our proposed methodology in terms of an empirical study on the banking sectors of five former communist countries during the period 2000–2008. Compared to the conventional approach, our model gives higher mean values of the Lerner index and smaller standard deviations. Further, we find a significant positive relationship between cost efficiency and market power of banks, thereby rejecting the “quiet life hypothesis.”

A Study on Cost Efficiency of Mutual Banks in Korea

A Study on Cost Efficiency of Mutual Banks in Korea

Cost and Profit Efficiency of Bangladeshi Commercial Banks: A Stochastic Frontier Approach

This paper assesses the cost and profit efficiency levels of banks consist of conventional, Islamic Shariah based and state-owned commercial banks in Bangladesh over the period of 2011 to 2015. Basic accounting ratios and stochastic cost and profit approaches originated by stochastic frontier analysis have been used in this study. From the results of accounting-based ratios used in this study, conventional private commercial banks are more efficient compared to Islamic Shariah based private commercial banks and state-owned commercial banks in the both cases of cost and profit. According to the stochastic cost frontier approach, the commercial banks in Bangladesh are not found considerable cost inefficient. The cost efficiency level of 35 commercial banks in Bangladesh is 91.4 percent. The results of this study indicate that traditional private commercial banks are more cost efficient compared to Islamic Shariah based and state-owned commercial banks. From the results of stochastic profit efficiency frontier, the conventional private commercial banks have the higher values of alternative profit efficiency levels than the state-owned and Islamic Shariah based commercial banks. It can also be drawn that around one-fourth of profits of banks are lost because of inefficiency over the period covered by this study.

The Efficiency and Inefficiency of the Banking Sectors: Evidence from Selected ASEAN Banking

This paper examines the cost efficiency of banks operating in selected countries of the Association of Southeast Asian Nations (ASEAN). We calculate the cost efficiency base on accounting efficiency and economic efficiency using Stochastic Frontier Analysis (SFA) and then classify it as efficient and not. Further, bank specific and economic variables are combined to determine the cost efficiency and the efficiency category (efficiency dummy) using linear regression and logistic regression. The results show that bank efficiency determined by asset size, dummy of economic crisis, interest rate gap, economic growth, inflation, capital, earning assets and loan losses provision. Only capital, earning asset and loan loss provision are consistent for accounting and economic efficiencies. For economic variable, economic growth and inflation rate are only significant in the accounting efficiency. The result implied that ASEAN banking should continue to consolidate the asset size and the authority should create high economic growth and a low inflation environment to make their banking industry more efficient. Keywords: Cost efficiency; ASEAN; SFA; economic variable

Cost efficiency and technological gap in Western European banks: A stochastic metafrontier analysis

This paper compares the cost efficiencies of banks in Western European countries using a new stochastic metafrontier Fourier flexible cost function for the period 1996–2010. One salient feature of our method is that the TGR can be linked with country-specific environmental variables. Results show that the average TGRs in these countries are close to one another, implying that banks operating in this integrated market undertake analogous technology. Moreover, the TGR and MCE exhibit a gradual upward trend during 1996–2000, followed by a downward trend especially after the subprime crisis of 2007–2010. The managerial inability constitutes the primary source of inefficiencies.

Banking efficiency in South East Europe: Evidence for financial crises and the gap between new EU members and candidate countries

In this study we compare the cost efficiency of banks in ten South East European countries and find out how differences in efficiency are related to EU membership. The results reveal a statistically significant cost efficiency gap between EU and non-EU banking systems in the region, where on average EU banking systems tend to be more cost efficient than their non-EU counterparts. In contrast to other similar studies analyzing banking efficiency in South East European countries, we also run β-convergence and σ-convergence tests, as proposed in the literature. Based on these tests we can draw conclusions concerning the existence of a catching-up effect, since the detected cost efficiency gap is closing predominantly because of adjustments on the side of the less efficient banks. Additionally, we found that during the 2008 global financial crisis, the average cost efficiency scores of banks in the region improved, which could be explained by enhanced incentives of bank managers for intensified cost optimization in banks in crisis times. Our results suggest that the institutional adjustments in the non-EU countries should continue towards EU standards, as the EU banking systems tend to dominate in terms of measured cost efficiency.