Cost Efficiency Of Banks Research Articles

Trademarking status and economic efficiency among commercial banks: Some evidence for the UK

As competition in the banking sector has intensified over the last two decades, commercial banks have started to use trademarks to differentiate their products and services from those offered by their competitors. Less clear are the implications of the trademarking activities on the commercial banks’ performance. In this paper, we compare the cost and profit efficiency of trademarking and non-trademarking banks in the UK, over the period 2001–2013 using stochastic frontier methods. We use Propensity Score Matching techniques to identify a sample of non-trademarking banks which share the same characteristics as the trademarking banks to ensure that variations in the efficiency between the commercial banks in our sample can be attributed to their trademarking status only. We then explicitly test the hypothesis that trademarking and non-trademarking banks share the same cost and profit frontiers. We cannot reject the hypothesis of a common cost and profit frontier. We also find that trademarking banks tend to be more profit efficient than non-trademarking banks while there is no significant difference between the cost efficiency scores of trademarking and non-trademarking banks.

Cost Efficiency of Italian Commercial Banks:A Stochastic Frontier Analysis

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.

Determinants of bank cost efficiency in transition economies: evidence for Latin America, Central and Eastern Europe and South-East Asia

In this study, we adopt Wang’s (2002) heteroscedastic stochastic frontier model, which allows us to investigate bank cost efficiency and to measure the marginal effects of some variables on both the level and the variability of inefficiency. In recent years, the financial crisis has significantly affected the banking systems of the transition countries. Hence, the efficiency is of major importance for the stability of the banks. Regarding the determinants of efficiency, we find evidence that banks that follow a more cautious strategy, characterized by lower risk appetite and average expectations on profitability, have higher cost efficiency. We also find that traditional deposit-taking and loan-making still remain the most efficient activity of the banks. Additionally, the results showed that a higher Gross Domestic Product growth rate implies an increase in the inefficiency level, indicating an unsustainable bank management behaviour, which in periods of economic growth adopts policies that can generate inefficiency in order to gain market share and to obtain higher bonuses. Country cost efficiency results show significant differences. The banking systems in transition countries in South Eastern Asia appear to have a higher cost efficiency level. Also, the effects of the financial crisis were less significant in this region.

The Integration of Cost and Profit Efficiencies in the European Union Banking Markets

This paper aims to investigate whether financial integration has taken place in the EU banking markets after stages of financial deregulation and transition period. We first measure bank cost and profit efficiencies using the stochastic frontier approach (SFA) for commercial banks operating in the 27 EU countries, and then we investigate the integration of EU banking efficiency over the period 2004-2010. By employing β- convergence and σ- convergence we assess the speed at which banking markets are integrated with regard to banking cost and profit efficiencies. The results seem to provide a solid evidence of convergence of cost and profit efficiency levels towards the averages in the entire EU, the old EU countries and the new EU countries groups. Nonetheless, the results also show that banks within the old EU countries are more integrated over the study period than their counterparts in the new EU countries particularly in the case of cost efficiency.

Efficiency Analysis of Full-Fledge Islamic Banks and Standalone Islamic Branches of Conventional Banks in Pakistan : A Comparative Study for the Period of 2007 - 2012

The main purpose of this study is to examine the (relative) efficiency of the full-fledged Islamic banks compared to standalone Islamic banking branches of conventional banks (CBs) operating in Pakistan over the period 2007-2012. The Data Envelopment Analysis (DEA) is employed under CRS and VRS approach, which allows for the decomposition of efficiency into technical, allocative and cost efficiency. The study also measures changes in productivity over the time as a result of technical progress by employing the Malmquist Total Factor Productivity Index. The results explain that the technical efficiency of standalone Islamic banking branches (IBBs) of the CBs is better than that of full-fledged Islamic banks, but allocative and cost efficiency of full-fledged Islamic banks are higher than that of IBBs of conventional banks.

Does Regulation in Credit, Labour and Business Matter for Bank Performance in the EU-10 Economies?

Cost efficiency scores for banks in ten new EU member countries of Central and Eastern Europe are estimated using a parametric approach (data envelopment analysis) for the period prior to and immediately following their accession (2000–2010). These are then used in both fixed effects and dynamic panels to estimate the impact of regulation on bank specific efficiency in the transition economies of the EU. Using the Fraser Index of Economic Freedom (Gwartney, Hall, and Lawson 2012) we find that, among all the indices of economic freedom, the composite regulation index that includes regulation in credit, labour and business has more importance for the banking sector as results suggest a positive and statistically significant impact on bank efficiency. By decomposing the regulation index into its three components (credit, business and labour regulation) we find that strict labour regulation is associated with lower bank cost efficiency while certain aspects of credit regulation such as foreign ownership and competition as well as private ownership are significantly associated with improved efficiency. The dynamic panel vector autoregression (VAR) results using impulse response functions and variance decomposition further support the validity of these results. These findings are valuable for both academics and policy makers in their attempts to understand the drivers of bank efficiency.

Evaluating the Operational Efficiency of the Banking Sector in Taiwan: A Two-Stage Data Envelopment Analysis Approach

Abstract In this study we adopted two-stage data envelopment analysis (DEA) methods, including the Charnes–Cooper–Rhodes and Banker–Charnes–Cooper methods, to evaluate the performance of marketing-orientation and profit-orientation activities on the cost efficiency of Taiwan's banks. The conventional DEA model was modified to take into account the series relationship for dividing two sub-processes in order to identify the causes of inefficiency. Information was obtained from 37 Taiwanese banks for the period from 2008 to 2011. The Malmquist total factor productivity index was employed to measure the effect of productivity changes on the panel data. The empirical results from the two-stage approach indicate the following: (1) the mean efficiency score of profitability stage banks is higher than that of the marketability stage banks; (2) the technical efficiency is significantly different from ranking according to the operating scale and pure technical efficiency, and the scale efficiencies are significantly different from ranking according to fixed assets; and (3) economies of scale and scope exist at small and medium-sized banks.

Impact of Information Technology (IT) Investments on the Cost Efficiency of Indian Private Sector Banks-A Stochastic Frontier Approach (SFA)

This research study explores the Cost efficiency of Indian Private Sector banks by employing Stochastic Frontier Approach (SFA). This paper empirically evaluated the impact of Information Technology (IT) on the Cost efficiency of the Indian private sector banks .The present study is based on panel data over the period of 2009-2013. For this study, all the 13 old private sector banks and 7 new private sector banks of India are being considered. This study identifies the average cost efficiency of old private sector banks found to be 94.9% and for new private sector banks 82.6% over the entire period of study. The findings of this study suggest that to some extent IT impact the cost efficiency of Indian private sector banks. Some of Old private sector bank cost inefficiency reduced by 28% for the study period by Information Technology (IT) and for New private sector banks cost inefficiency reduced by 11.3% Information Technology (IT). Thus, Information Technology contributes to cost efficiency to both old and new private sector banks.

The random parameters stochastic frontier cost function and the effectiveness of public policy: Evidence from bank restructuring in Mexico

We apply specifications of the random parameters stochastic frontier cost function model to estimate bank efficiency. This class of model appears to resolve the long standing problem of confounding inefficiency and heterogeneity. Mean cost efficiencies from random models are higher by as much as eleven percentage points compared to pooled OLS estimates. Whilst tests show efficiencies are not drawn from the same population, rank order efficiencies are strongly associated. In a second step, we employ the estimated efficiencies to determine the effect of foreign acquisitions on bank cost efficiency following legislative reforms made as part of Mexico's bank restructuring programme in 1995. Foreign bank acquisition does not significantly affect efficiency whereas consolidation of local banks yields significant long-term improvements in efficiency. We recommend random parameters stochastic frontier models since they better accommodate heterogeneity and produce more precise estimated efficiencies.

Efficiency of Islamic and conventional banks in Malaysia

PurposeThe main purpose of this paper is to examine cost efficiencies of the selected Islamic and conventional commercial banks over the period of 2006 to 2009 in Malaysia.Design/methodology/approachData envelopment analysis (DEA) was initially used, to investigate the cost efficiency of the Malaysian banking sector and followed by Tobit regression analysis determine factors influencing the efficiency of Islamic and conventional banks in Malaysia.FindingsThe DEA results reveal technical efficiency as the main contributor of cost efficiency for conventional commercial banks and allocative efficiency as the main contributor for cost efficiency of Islamic commercial banks. This indicates conventional commercial banks have been efficient in utilizing information technology and electronics. Islamic commercial banks conversely have been efficient in allocating and utilizing their resources. Additionally, scale efficiency is found to be the main source of technical efficiency for both Islamic and conventional commercial banks, denoting that size is important in improving bank efficiency. The results of Tobit regression analysis are twofold. First, it documents capitalization and bank sizes are positively and significantly associated to efficiency. Secondly, loan quality is found to be negatively and significantly associated to efficiency.Originality/valueThis paper contributes to the body of knowledge through its literature discussions on the efficiency of both Islamic and conventional banks and the effect of banks' specific characteristics on their efficiency.

EFFICIENCY AND COMPETITION IN THE GHANAIAN BANKING INDUSTRY: A PANEL GRANGER CAUSALITY APPROACH

This study examines the causal link between bank efficiency and bank competition. The study estimates bank competition with the Lerner index and bank cost efficiency with data envelopment analysis using annual data over the period 2001–2010. Using system generalized method of moments (system GMM) estimator, the results suggest that bank cost efficiency positively Granger-causes market power and hence causality negatively runs from bank cost efficiency to bank competition indicating that bank cost efficiency precedes bank competition. However, the reverse causality running from bank competition to bank cost efficiency is not supported.

Measuring cost efficiency in presence of heteroskedasticity: The case of the banking industry in Taiwan

We measure cost efficiency of commercial banks in Taiwan using annual data for the 1996–2011 period. Following Caudill et al. (1995), and Caudill and Ford (1993), we develop a generalized dynamic model that accounts for heteroskedasticity in the cost inefficiency component of the error term in the stochastic frontier (SF) model and adopt a single-step approach (e.g., Battese and Coelli, 1995; Wang and Schmidt, 2002) to circumvent the problems associated with the two-step estimation procedure used by prior studies. We show that the results based on the heteroskedastic stochastic frontier (HSF) model combined with the single-step estimation approach sharply contrast with that of the traditional ‘two-step’ approach. These are important findings because they point to the limitations of previous studies on cost efficiency that use a two-step estimation approach. Our findings suggest that asset size, loan quality, and bank equity-to-asset ratio have significant negative impact on cost efficiency of banks. Government-owned banks in Taiwan are more likely to be cost efficient than privately owned banks. Macroeconomic environmental factors such as money supply and foreign exchange reserve ratio are likely to influence the cost efficiency of banking industry in Taiwan.

A study of cost efficiency of Indian commercial banks- An impact of mergers

This paper investigates the cost efficiency of Indian public and private sector banks over the period 1990-2008 with unbalanced panel data by employing non-parametric data envelopment analysis technique (DEA). In this paper, an attempt is also made to examine the determinants of cost efficiency of banks by employing panel data least square regression model. The study found that private sector banks are more efficient than public sector banks with average cost efficiency score 73.4 for public sector banks as of 76.3 for the private sector banks in the country. The findings of this study suggest that the dominant source of cost inefficiency among Indian commercial banks is allocative efficiency rather than technical inefficiency. The study has examined the impact of merger activity on the cost efficiency of Indian banks by employing OLS model and found the positive and significant impact of merger activity on efficiency. Among other factors associated positively and significantly with the efficiency are the size and profitability of banks and suggesting that banks with higher ROA exhibits higher efficiency scores. Key words: Efficiency, DEA, profitability, banks, regression, mergers.

An examination of the cost efficiency of banks in Taiwan and China using the metafrontier cost function

Using the stochastic metafrontier framework of Battese et al. (J Prod Anal 21:91–103, 2004), this study proposes to compare and measure the cost efficiency and cost frontier gap between the banking industry in Taiwan and China. It further identifies environmental variables that determine bank’s cost frontier gap between two countries. Data on 69 sample banks for years 2005–2009 are used in the empirical analysis and inference. The empirical results show that Taiwanese banks have in general the superior cost frontier of production, but inferior cost efficiency of operation than Chinese banks. Private banks in Taiwan have the best cost frontier, whereas foreign banks in China are most cost efficient among all banks in Taiwan and China. The empirical results also reveal that the majority of Taiwanese banks are undersized and that most banks in China are oversized. Finally, the regression results show that the financial market structure, institutional environment, and political development are significant determinants of the cost gap between the cost frontiers of banks in Taiwan and China. Therefore, programs related to changes directed toward a better bank production environment can be initiated to improve the cost technologies of banks in both Taiwan and China.

Measuring Cost Efficiency of Ukrainian Banks in 2008

The paper presents the results of a stochastic frontier analysis (SFA) of cost-efficiency of Ukrainian banks. As of lack of data on the personnel costs, we had to set limits to the year of 2008 only. To modeling banking activity, we apply the intermediary approach as one of the most commonly used in literature. Considering the results of statistical tests, we chose translog functional form of cost function and half–normal distribution of random inefficiency term. As a result of the research, we found out that efficiency of Ukrainian banks varies within 0.5224 and 0.9869 with an average value of 0.8734. Having checked a range of hypotheses, we discovered insignificant distinctions among banks by their size, type of owner and location.

Efficiency and risk in commercial banking: empirical evidence from East Asian countries

This paper analyses the effects of off-balance sheet (OBS) activities and various types of risks on the cost and profit efficiencies of banks in seven East Asian countries between 2001 and 2008. Cost and profit efficiency scores are estimated using the data envelopment analysis approach. The results of this analysis are then used to identify the impact of OBS activities and risk exposures on cost and profit efficiencies using a Tobit regression. Bank insolvency risk (as measured by z-scores) is positively related to profit efficiency, while interest sensitivity, size, equity to total assets and OBS exposures all impact on cost efficiency. The analysis of the impact of input and output slacks illustrates that in around 1 in 5 cases banks’ cost efficiency can be improved by adjusting the former variables, whereas in only around 1 in 100 cases a similar outcome is possible for profit efficiency.

Do Mergers Improve the Efficiency of Banks in Taiwan?: Evidence From Stochastic Frontier Approach

Banking consolidation is a global trend, but in Taiwan, after the failure of the Second Financial Reform, it does not have a clear policy for bank mergers. This paper investigates whether mergers influence the cost efficiency of banks in Taiwan, and our results suggest that the government should utilize market mechanism to encourage FHC or large banks’ mergers. We use the method of stochastic frontier approach (SFA) to investigate the uncertain relationship between merger and the cost efficiency of Taiwanese banks. Based on Battese and Coelli (1995), we use maximum likelihood estimation method to estimate the stochastic cost efficiency model and the inefficient model simultaneously. We find that, for Taiwanese banks, technology efficiency increases with time by lowering operation cost; cost efficiency decreases right after merger, and has to wait for three years to regain efficiency. The larger banks and FHC banks benefit more from cost savings than smaller banks.

Explaining Bank Efficiency Differences Between China and Taiwan by Meta-Frontier Cost Function

The purpose of this paper is to employ the Meta-Frontier Cost Function to compare the efficiencies of banks in China and Taiwan over the period 2003–2009. Different from previous literature using loans and securities as the output variables in evaluating banking efficiency, we propose two new variables: interest income on loans and nonperforming loans, to identify whether the banks are both cost and profit efficient and to control the quality of loans. Evidence is found that the average cost efficiency of China's banks leads the Taiwanese banks with a significant gap. Some policy implications are provided accordingly.

Banking industry liberalisation in Ghana

Economic liberalisation is characterised by the entry of foreign companies and the emergence of new domestic institutions to compete with the existing institutions of lending, and there is a view that the process leads to greater efficiency, especially because foreign banks bring new expertise. Extracting information from accounts lodged with Ghana Central Bank, this paper ranks the cost efficiency of banks, Theil decomposition of the cost efficiency scores allows for a comparison of performance between banks under different types of ownership. There is pronounced differences in efficiency scores within and between groups by type of ownership, but foreign ownership, per se, is not the determining factor.

Banking reforms and the evolution of cost efficiency in Indian public sector banks

This paper analyses the trends of cost efficiency and its components across Indian public sector banks (PSBs) during the post-deregulation period spanning from 1992/1993 to 2007/2008. The study also examines the issue of convergence in cost, technical and allocative efficiency levels of Indian PSBs. The empirical results indicate that deregulation has had a positive impact on the cost efficiency of Indian public sector banking industry over the period of study. Further, technical efficiency of Indian PSBs followed an uptrend, while allocative efficiency followed a path of deceleration. We note that in Indian public sector banking industry, the cost inefficiency is mainly driven by technical inefficiency rather than allocative inefficiency. The convergence analysis reveals that the inefficient PSBs are not only catching-up but also moving ahead of the efficient ones, i.e., the banks with the low level of cost efficiency at the beginning of the period are growing more rapidly than the highly cost efficient banks. In sum, the study confirms a strong presence of σ- and β-convergence in cost efficiency levels of Indian public sector banking industry.