Expansion and Efficiency in Banking: Evidence from Ghana

We use a translog functional form to estimate a stochastic frontier function of cost and profit efficiency (PE) of Ghanaian banks under the Battese–Coelli time‐varying decaying inefficiency parameterization for (unbalanced) panel data. We regressed efficiency estimates on a distance variable controlling for bank size, total cost, and profits. We find that Ghanaian bank PE is worsening, whereas cost efficiency is improving for the period analyzed. Our results show that PE is not related to distance, size, or cost and profitability ratios. Distance is however positively and significantly related to cost efficiency. Cost efficiency is however not influenced by size or cost and profit ratios. Copyright © 2011 John Wiley & Sons, Ltd.     

Productivity and efficiency dynamics in Indian banking: An input distance function approach incorporating quality of inputs and outputs

Banking technology is typically characterized by multiple inputs and multiple outputs that are associated with various attributes, such as different types of deposits, loans, number of accounts, classes of employees and location of branches. These quality differentials in inputs and outputs are mostly ignored in empirical studies. These omissions make the practical value of productivity studies in organizations like banks questionable because quality is a key component of performance. This paper proposes using hedonic aggregator functions (as a tool of aggregating inputs and outputs with quality attributes) within an input distance function framework and analyzes the impact of banking deregulation on efficiency and total factor productivity (TFP) change in the Indian banking industry using panel data for the period 1996–2005. Empirical results indicate that banks have improved their efficiency (from 61% in 1996 to 72% in 2005) during the post‐deregulation period, and the gain in efficiency of state‐owned banks has surpassed that of private banks. Improvement in capital base, as indicated by increased capital adequacy ratio, played an important role in ushering efficiency gain. The return to scale estimate suggests that state‐owned banks are operating far above their efficient scale and cost savings can be obtained by reducing their size of operations. Overall, TFP growth was above 3.5% annually. Both technical progress and technical efficiency change consistently played an important role in shaping TFP growth. Copyright © 2010 John Wiley & Sons, Ltd.     

Inefficiency and heterogeneity in Turkish banking: 1990–2000

Recent studies have stressed the importance of privatization and openness to foreign competition for bank efficiency and economic growth. We study bank efficiency in Turkey, an emerging economy with great heterogeneity in bank types and ownership structures. Earlier studies of Turkish banking had three limitations: (i) excessive reliance on cost‐function frontier analyses, wherein volume of loans is a measure of banking output; (ii) pooling all banks or imposing ad hoc heterogeneity assumptions; and (iii) lack of a comprehensive panel data set for proper analysis of productivity and heterogeneity. We use an estimation–classification procedure to find likelihood‐driven classification of bank technologies in an 11‐year panel. In addition, we augment traditional cost‐frontier analysis with a labour‐efficiency analysis. We conclude that state banks are not particularly inefficient overall, but that they do utilize labour inefficiently. This partially supports recent calls for privatization. We also conclude that special finance houses (or Islamic banks) utilize the same technology as conventional domestic banks, and do so relatively efficiently. This suggests that they do not cause harm to the financial system. Finally, we conclude that foreign banks utilize a different technology from domestic ones. This suggests that one should not overstate their value to the financial sector. Copyright © 2005 John Wiley & Sons, Ltd.     

银行业改革、赶超与开放——基于Malmquist TFP指数的实证分析

为评估近年来中国国有银行改革、城市商业银行赶超与银行业对外全面开放5年来外资银行效率的变化,主要采取"中介法",利用2005～2010年数据对中国本土和外资银行Malmquist TFP指数及其组成部分进行了测算分解和实证分析。研究表明:改革促进了中国银行业效率的提高;城市商业银行的"赶超"战略显著提升了效率;中国本土银行的纯技术效率亟待改善;中国银行业对外全面开放后,外资银行的全要素生产率有所提高,但规模效率和技术进步有待改进;股权/资产比率等因素降低了银行效率。     

Do business strategies vary across firms in the banking industry? New perspectives from the bank size–profitability nexus

This study examines the roles of interdependence and policy variations across firms in the causality between bank size and profitability in Nigeria, using second-generation estimators and the Dumitrescu–Hurlin panel Granger non-causality test. The findings support different business strategies and policy variances across banks. Causality is found non-existent in the cases of 11 banks. A unidirectional causality from size to profitability is established in two banks while evidence of a unidirectional causality is established from profitability to bank size in the other two banks. This study concludes that cross-sectional dependence and policy variations across firms matter in the bank size–profitability nexus.     

A cross-country comparison of productivity growth using the generalised metafrontier Malmquist productivity index: with application to banking industries in Taiwan and China

This paper is an extension of the metafrontier Malmquist productivity index, which takes into account the effect of scale efficiency change in its decomposition for both the non-parametric and parametric frameworks. Meanwhile, the ‘catch-up’ in the index is also disintegrated as two components: pure technological catch-up and frontier catch-up. An empirical application that uses unbalanced panel data of the Taiwanese and Chinese commercial banking industry is also conducted under a parametric framework. The results reveal that the adverse scale efficiency change is the key factor to inducing the inferior productivity growth seen in Chinese banks compared with Taiwanese banks, which spotlights the importance of the scale efficiency change term on productivity measures. It also provides one possible explanation for the recent hot issue about the motives for the two shores of the Taiwan Straits advancing financial openness to each other and mutually signing a banking Memorandum of Understanding.     

Credit risk of subsidiaries of foreign banks in CEE countries: Impacts of the parent bank and home country economic environment

In this study, using dynamic panel data, we investigated the influences of the home country economic environment and parent bank condition on the credit risk of foreign banks in Central and Eastern European (CEE) countries. We concentrated on the international transmission of credit risk through the internal capital market of multinational banks. Our theoretical assumptions follow studies that document how the parent bank condition and home country macroeconomic environment affect lending in subsidiaries in CEE countries. However, our results go one step further. We provide evidence that these relationships are reflected in subsidiaries’ credit risk in CEE countries. Our results suggest that the size and profitability of the parent bank have negative influences, while the liquidity and credit risk of the parent bank have positive influences on the subsidiaries’ credit risk. Moreover, the GDP growth in the parent bank’s country has a negative effect on the credit risk of the subsidiary, while the lending rate and liquidity in the parent bank country cause growth in the credit risk. These results indicate a new channel of international risk transfer from parent bank countries to host countries through foreign-owned banks.     

Productivity and computers in Canadian banking

Canadian banks have invested millions in computer systems in the last two decades. Yet the banks and outside observers have been uncertain that these investments have had net benefits. In this paper, unique data collected directly from a bank is used to investigate the impact of these investments on bank output, input and productivity. Using data from 1974–1987, a translog cost model is estimated. Both capital and labor are divided into information and noninformation inputs. The results are generally consistent with economic theory. The attempt to separate technical change from possible scale effects is very sensitive to alternative specification. Overall there has been some productivity growth associated with the changing computer technology. However, many of the benefits seem to have accrued to the customer and have not directly lead to gains for the bank.     

The Effect of Financial Liberalization on the Efficiency of Financial Institutions: The Case of Jordanian Commercial Banks

SUMMARY

Jordan undertook major financial sector liberalization starting in the early of 1990s. The effect of this reform on the efficiency of the banking sector is evaluated. A non-parametric method of Data Development Analysis (DEA) has been used to arrive at the efficiency scores for a panel data sample covering eight Jordanian commercial banks over the period 1984 to 2001. The findings suggest that liberalization program was followed by an observable increase in efficiency. Another finding of the study is that large banks demonstrated the faster productivity growth during the liberalization. The study has important implications such as guiding the government policy regarding deregulation and liberalization.     

Cyclicality of bank credit growth: Conventional vs Islamic banks in the GCC

Using a panel of 104 banks from the six Gulf Council Countries, we investigate the cyclicality of credit growth with regard to the discrepancies between Islamic banks and conventional banks. We found that Islamic banks are pro-cyclical and have higher credit growth compared to conventional banks. Indeed, the Profit and Loss Sharing (PLS) mechanism helps Islamic banks not to curb their credit growth during adverse economic conditions. We tested the role of the growth rate of market sentiment and found that positive market sentiment leads to higher bank credit growth. Furthermore, we investigate the impact of several bank-specific variables on bank credit growth and discuss to what extent diversification and the investment portfolio reshape the credit growth process.     

Form of ownership and risk taking in banking: Some evidence from Massachusetts savings banks

In recent years there has been interest in the impact of the form of ownership on the behavior of financial institutions. In the 1980’s, there was a substantial movement away from mutual ownership to stock ownership in the thrift industry. The effect of this conversion process on risk taking and efficiency has been a matter of concern. The purpose of this paper is to examine the experience of savings banks in Massachusetts. A panel of 115 savings banks is analyzed for the years 1985 through 1993, a period that includes both rapid growth and a subsequent severe cyclical decline in property values. The credit quality of loan portfolios is related to the size of the portfolio, the structure of the portfolio, and the ownership status of the bank. Several models are estimated. In all cases, it was found that the cyclical decline in property values resulted in a decline in the credit quality of loan portfolios with a substantially greater impact on those savings banks that converted from mutual to stock status.     

Factors influencing bank risk in Europe: Evidence from the financial crisis

We use a dynamic panel data model to analyze bank-specific and macroeconomic determinants of bank risk for a large sample of commercial banks operating in the euro area. The selected time span, from 2001 to 2012, considers the impact of the on-going financial and economic crisis on the Eurozone banking system. Our results indicate that capitalization, profitability, efficiency and liquidity are inversely and significantly related to bank risk. However, the recourse to wholesale funding by banks seems to increase their risk. We also find that less-concentrated markets, lower interest rates, higher inflation rates and a context of economic crisis (with a falling GDP) increase bank risk.     

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.     

Does financial regulation affect the profit efficiency and risk of banks? Evidence from China's commercial banks

The goal of financial regulation is to enable banks to improve liquidity and solvency. Stricter regulation may be good for bank stability, but not for bank efficiency. This research aims to examine whether banks have met the CBRC's standard of financial regulations and explores how the previously implemented financial regulations have affected bank efficiency and risk in the past. In addition, we also explored the trade-off relationship between efficiency and risk. Unlike other studies, this study used bank assets as a classification standard from the financial risk and differential regulatory perspective.The empirical results indicate that the CBRC regulates the provision coverage ratio and cost-to-income ratio, which seems relevant to large banks and the loan-to-deposit ratio, capital adequacy ratio, and leverage ratio, which seems relevant to small banks. The CBRC regulates the current ratio to reduce the risks of banks. Based on our empirical results, the current ratio did not affect the risks and led to different efficiency results between large and small banks. In an environment with asymmetric information, a bank decision-making is unobservable. The characteristics of financial regulation provide market clues if a bank is operating at the most efficiency and risk condition.     

Efficiency and productivity of the US banking industry, 1998–2005: evidence from the Fourier cost function satisfying global regularity conditions

This paper provides estimates of bank efficiency and productivity in the United States, over the period from 1998 to 2005, using (for the first time) the globally flexible Fourier cost functional form, as originally proposed by Gallant ( 1982 ), and estimated subject to global theoretical regularity conditions, using procedures suggested by Gallant and Golub ( 1984 ). We find that failure to incorporate monotonicity and curvature into the estimation results in mismeasured magnitudes of cost efficiency and misleading rankings of individual banks in terms of cost efficiency. We also find that the largest two subgroups (with assets greater than 1 billion in 1998 dollars) are less efficient than the other subgroups and that the largest four bank subgroups (with assets greater than $ 400 million) experienced significant productivity gains and the smallest eight subgroups experienced insignificant productivity gains or even productivity losses. Copyright © 2008 John Wiley & Sons, Ltd.     

Productivity changes in pre-crisis Western European banks: Does scale effect really matter?

Insofar as the completion of the Single Market for Financial Services, it has presented new challenges for European Banking industries. In this study, we use a recently developed generalized metafrontier Malmquist productivity index (gMMPI) to provide insights on productivity growth. We extend the gMMPI to broaden the index's capacity by decomposing various sources of productivity change in the metafrontier context. The sample contains commercial banks from 12 Western European countries prior to the recent financial crisis. A key advantage of our extension is that it introduces the role of scale effects. The empirical results show that an average bank's productivity growth arises mainly from technical changes and scale effects. Moreover, smaller and larger banks grow faster than medium ones. In addition, conservative banks tend to grow faster. These findings suggest that a more competitive and integrated financial market induced by financial deregulation is indeed able to improve banks’ productivity.     

中国的银行业竞争结构对国际贸易影响的区域收敛性

本文通过建立内生经济增长理论模型,利用我国1996～2009年30个省份的面板数据,建立空间面板数据模型考察银行业竞争结构对国际贸易影响的区域差异性。研究结果表明,在控制银行业竞争结构、外商直接投资水平等差异后,各省份国际贸易的增长符合条件β收敛假说,表明省际间银行业竞争结构差异是造成各省份对外贸易差异的原因,缩小省际间银行业结构差异,加快落后地区中小银行的发展,提升银行业的竞争力度有利于国际贸易差距的减小。本文为通过改善银行业的结构关系可以促进内陆开放经济高地建设提供了理论及实证依据。     

Macroeconomic uncertainty and bank lending: The case of Ukraine

This study investigates the link between bank lending behavior and country-level instability. Our dynamic model of bank's profit maximization predicts a non-monotonic relationship between bank lending and macroeconomic uncertainty. We test this proposition using a panel of Ukrainian banks over the 2003Q2–2008Q2 period. The estimates indicate that banks decrease their lending ratio in times of substantial economic volatility, which could be explained by higher risk aversion of bank managers. Additionally, small and least profitable banks are less likely to be affected by changes in the macroeconomic environment compared to their large and most profitable peers. This outcome is robust with respect to the different measurements of macroeconomic uncertainty.     

Assessing output and productivity growth in the banking industry

This paper assesses the evolution of output and productivity in the Greek banking industry for the period 1990–2006. Three main categories of bank output were estimated based on modern theoretical approaches, while for the estimation of output and productivity (partial and total factor) we relied on the index number method (Tornqvist index). We also considered the effect of labor quality on banks’ productivity and the contribution of total factor productivity to bank output growth. Bank output and labor productivity outpaced considerably the respective GDP growth and labor productivity of the Greek economy during the period under examination. Capital and total factor productivity have also improved remarkably mainly since 1999, due to the structural changes that took place within the industry, capital (mainly IT) investments and improvement in the quality of human capital.     

Non-interest income,profitability, and risk in banking industry: A cross-country analysis

Using bank accounting data for 22 countries in Asia over the period 1995–2009, this article applies the dynamic panel generalized method of moments technique to investigate the impacts of non-interest income on profitability and risk for 967 individual banks. We find that non-interest activities of Asian banks reduce risk, but do not increase profitability on a broad sample basis. Specifically, when considering bank specialization and a country's income level, the results become complicated. Non-interest activities decrease profitability as well as increases risk for savings banks. The impact is also different for commercial, cooperative, and investment banks either by increasing profitability or reducing risk. On the other hand, non-interest activities raise risk for banks in high income countries, while increasing profitability or reducing risk for banks in middle and low income countries. Finally, our results reveal that the persistence of risk is greatly affected by bank specialization and a country's income level, as all risk variables present persistence from one year to the next. Our findings suggest that the type of bank specialization matters for the effect of diversifying revenue sources.