Determinants of banks’ Nerlovian economic efficiency: a DEA-bootstrap approach

ABSTRACT

This study aims to evaluate the Nerlovian economic efficiency of Taiwanese commercial banks and its determinants by assuming the presence of an imperfectly competitive market using a two-stage estimation procedure: Nerlovian economic inefficiency and its components’ price, technical and allocative efficiencies computed and decomposed in the first stage, which are regressed on the explanatory variables with a bootstrapped truncated approach in the second stage. The estimation results show that in the first-stage analysis, the Nerlovian economic inefficiency of banks is primarily due to allocative inefficiency, and indicate the existence of price inefficiency in Taiwan. In the second-stage analysis, the results confirm that both the years in operation of the bank and the ratio of credit loans are the main determinants of banking profit efficiency. In addition, this study not only shows that publicly owned banks contribute to better price efficiency but also proves that loan loss reserve to total assets is negatively associated with technical efficiency. The equity ratio exerts an insignificant favourable impact on allocative efficiency. The findings of this research are essential for bank managers in Taiwan.     

Banking deregulation and allocative efficiency in Pakistan

This article examines the impact of deregulation policies on allocative efficiency of banks in Pakistan. It investigates whether deregulation has impacted the pattern of allocative efficiency of banks and explores which bank ownership segment has been more responsive. It uses data from 1991 to 2005 and explicitly models allocative inefficiency by using the translog shadow cost-share system. Empirical results show that overregulation and imperfect market structure hampers the ability of banks to make competitive decisions. We find evidence of allocative inefficiency leading to over-utilization of labour and deposits vis-à-vis operating cost. Empirical results for time-varying allocative efficiency show declining levels of allocative inefficiency for state-owned and private banks in post-reform period. Deregulation policies induce state-owned banks to decrease over-utilization of labour relative to deposits and operating cost while private banks succeed in using operating cost closer to optimal levels. Hence, policymakers have latitude to introduce more reforms without jeopardizing allocative efficiency.     

BANK MERGERS AND ACQUISITIONS – AN EVALUATION OF THE ‘FOUR PILLARS’ POLICY IN AUSTRALIA*

This paper examines the efficiency consequences of bank mergers and acquisitions with particular reference to the ‘four pillars’ policy preventing mergers among the four major banks. Using data envelopment analysis, the technical efficiencies of banks operating in Australia over the period from 1983 to 2001 are estimated. A second‐stage regression is used to evaluate ex‐post efficiency performance of banks involved in mergers and acquisitions. The empirical results demonstrate that for the time being mergers among the four major banks may result in much poorer efficiency performance in the merging banks and the banking sector.     

Measuring and explaining the efficiencies of the United Arab Emirates banking system

Using newly collected data from a survey distributed to all banks in the United Arab Emirates (UAE), this article measures economic efficiency in the banking industry, namely allocative, technical, pure technical and scale efficiency. Employing a nonparametric Data Envelopment Analysis (DEA) approach, the study estimates the efficiency for a cross section of the UAE banks in 2004. The results indicate that the dominant source of inefficiency in the UAE banking is stemming from allocative inefficiency rather than technical inefficiency. Furthermore, the main source of the relatively small size, technical inefficiency in the UAE banking industry is not the scale inefficiency but rather pure technical inefficiency. The results further indicate that the UAE banks are able to use their input resources more efficiently when they have more branches, and that newer banks are performing better than older banks on average. Moreover, the results also show that short experiences of employees affect efficiencies negatively and government ownership tends to reduce efficiency (as the government shares increase in the bank, the efficiency scores get lower). Finally, the most interesting results have to do with finding higher average efficiencies in banks that employ more women, more managers and less national citizens of the UAE.     

Corporate governance and efficiency in banking: evidence from emerging economies

ABSTRACT

This article investigates the impact of corporate governance on bank efficiency across a sample of 139 commercial banks from 17 countries of Central and Eastern Europe during the period 2005–2012. Data on governance characteristics are hand-collected from banks’ reports. The empirical findings indicate that implementing rigorous corporate governance structures is associated with higher costs for banks and a lower level of efficiency. However, during the crisis, a tight governance mechanism significantly increases banks’ cost and technical efficiencies. We also show that prudent risk management is associated with both higher cost and technical efficiency for more capitalized banks, while rigid supervisory boards are linked with greater technical efficiency for more capitalized banks.     

Technical efficiency and scale efficiency in the Italian banking sector: a non-parametric approach

Measures of technical and scale efficiencies are derived in the Italian banking industries by implementing non-parametric Data Envelopment Analysis on a cross section of 174 Italian banks taken in 1991. The methodology of the parametric and non-parametric approaches to measure efficiency are discussed. The existence of both technical and allocative efficiency is established. This result is robust to modifications in the specification of inputs and outputs suggested by the Intermediation Approach and by the Asset Approach. In implementing both the Intermediation and the Asset Approach the traditional specification of inputs is modified to allow an explicit role for financial capital. In addition, regression analysis is used on a bank-specific measure of inefficiency to investigate determinants of banks' efficiency. Efficiency is best explained by productive specialization, size and, to a lesser extent, by location.     

Ownership,competition, and bank productivity: An analysis of Indian banking in the post-reform period

This paper investigates the effect of ownership and competition on Indian bank productivity since the 1991 reforms. We find that Indian private banks dominate the public and foreign banks both in terms of productivity levels and productivity growth, with the new Indian private banks leading the charge. Competition has a positive impact on productivity for the old Indian private banks, and all the other banks are hurt by competition — the worst hit being new Indian private banks. A similar picture emerges on the productivity growth side, with the new Indian private bank productivity growth being the worst affected as competition increases. An analysis of the pre- and post-1998 periods shows that the latter period displays a much higher productivity gap between the Indian private banks and the public and foreign banks. Indian private bank productivity and productivity growth suffer due to increasing competition in the post-1998 period.     

The Effects of Screening and Monitoring on Credit Rationing of SMEs

In this paper, we seek to empirically assess which determinants of the capability and incentives of banks to screen and monitor firms are significant in explaining credit rationing to Italian SMEs. After testing for the presence of non‐random selection bias and the potential endogeneity of some determinants of interest, the probit model results we obtain suggest that the average banking size and the multiple banking relationship phenomenon are statistically significant factors affecting credit rationing, presumably through their impact on the aforementioned banks' capability and incentives. Other potential determinants of banks' incentives to monitor and screen, such as local banking competition and firm' capacity to collateralize, are never significant. However, when we split the sample according to the level of competition in credit markets, we find that the estimated marginal effects of all significant determinants of interest are larger in absolute value than those obtained when using the whole sample.     

A test of the impact of mergers on bank competition

We propose a new test to evaluate the impact of horizontal mergers on competition in the banking industry. The test is designed to be applied ex ante to potential mergers while being parsimonious in terms of data, as it only uses information on branches in local markets. The test is a counterfactual exercise based on a two‐stage model where banks compete in branching and interest rates and requires comparing the estimated degree of competition in the status quo, where branching networks by banks are those actually observed, with a counterfactual scenario, where the branching network of the new entity is the sum of the branches of the banks involved in the horizontal merger. The statistical difference between the two estimated measures of competition quantifies the impact of the merger. We apply our test to French and Italian mergers.     

Banking efficiency and competition in low income countries: the case of Uganda

There is a concern that the state dominated, inefficient and fragile banking systems in many low-income countries, especially Sub-Saharan Africa, are a major hindrance to economic growth. In this context, this article systematically analyses the impact of the far-reaching banking sector reforms undertaken in Uganda on banking sector competition and efficiency. Using models of banking competition and efficiency that have been predominantly estimated in industrial countries, we find that the level of competition has significantly increased and has been associated with a rise in efficiency of the sector. Moreover, on average, larger banks and foreign-owned banks are more efficient than others while smaller banks have fallen back in efficiency with the increase in competitive pressures.     

The Efficiency of China's Banking Industry and the Determinants

The recent global financial crisis highlights the importance of a sound financial sector for economic development. This paper evaluates the economic efficiency of China's banking industry and investigates the determinants of this efficiency. Our analysis shows that the average economic efficiency of joint-stock commercial banks is highest, followed by the ‘Big Four’ state-owned commercial banks and city commercial banks. The economic inefficiency of these banks during the past 15 years was mainly caused by technical inefficiency, and this technical inefficiency was mainly caused by scale inefficiency. Using the scores of efficiency as dependent variables, the paper also comprehensively studies the impact of (1) the characteristics of individual banks, (2) the characteristics of the whole banking industry and (3) macroeconomic factors on banking efficiency. The results suggest a number of factors that banks can work on to improve efficiency and lend support to deepening reforms in the Chinese banking industry, including regulatory reforms that require capital adequacy in a more strict way, reforms that introduce more competition and, more broadly, reforms that aim at establishing institutions that can truly commercialize Chinese banks. Last but not least, the efficiency of banking depends on healthy growth of the overall economy.     

Estimating input-mix efficiency in a parametric framework: application to state-level agricultural data for the United States

ABSTRACT

This paper contributes to the productivity literature by demonstrating novel econometric methods to estimate input-mix efficiency (IME) in a parametric framework. Input-mix efficiency is defined as the potential improvement in productivity with change in input mix. Any change in input-mix (e.g., land to labou r ratio) will result in change in productivity. The advantage of this approach is that it does not require data on input prices to estimate the mix efficiency levels. A nonlinear input-aggregator function (e.g., Constant Elasticity of Substitution) is used to derive an expression for input-mix efficiency. Bayesian stochastic frontier is estimated for obtaining mix efficiency using US state-level agricultural data for the period 1960–2004. Significant variation in input-mix efficiency is noted across the states and regions, attributable to diverse topographic and geographic conditions. Furthermore, comparisons of allocative and mix efficiencies provide insightful policy implications. The production incentives such as taxes and subsidies could help farmers in adjusting their input mix in response to changes in input prices, which can affect the US agricultural productivity significantly. The proposed methodology can be extended by i) using flexible functional forms; ii) introducing various time- and region-varying input aggregators; and iii) defining more sophisticated weights for input aggregators.     

The effect of risk-based capital requirements on profit efficiency in banking

The purpose of this paper is twofold: to show how to measure profit efficiency in banking using a newly developed technique, and to use that technique to determine the effect of risk-based capital requirements on the profit performance of US banks. The measure of profit efficiency used captures deviations from profit maximization arising from technical inefficiency, caused by a lack of managerial oversight and allocative inefficiency, which is caused by managers choosing a nonoptimal mix of inputs and outputs. A leverage ratio constraint and a risk-weighted capital ratio constraint are explicitly included in the model, which allows identification of the effect on profits of those constraints. The techniques are applied to random samples of US banks for 1990, 1992, and 1994. The results indicate that allocative inefficiency is a larger source of profit loss than technical inefficiency and that the risk-based capital standards have a significant effect on bank allocative efficiency.     

Evaluating Partial Reforms in the Chinese State Industrial Sector: a stochastic frontier cost function approach

China's phenomenal economic growth since 1979 is seen by many as a challenge to the belief that the clarification of property rights is a necessary step of successful transition from a planned economy to a market economy. Instead of mass and rapid privatization, reforms in the Chinese state industrial sector in the 1980s were attempted to reconstruct the incentive structure of enterprises by linking rewards to performance, expanding managerial freedom and exposing enterprises to market influences. This paper investigates the extent to which the partial reforms have transformed the behaviour and performance of state-owned enterprises (SOEs). Using a panel of observations on 769 SOEs from ten manufacturing industries during 1980 and 1989, a stochastic cost frontier function is estimated to measure the effect of various reform measures on both technical and allocative efficiency. We found that the average cost efficiency level increased by 1.18% per annum during the decade. The efficiency effects of the industrial reform programme are mixed. While performance-related bonuses and market competition appear to have had the intended impact, there is evidence that devolution of decision-making power to the firm level has led to deterioration in efficiency. Therefore, although the partial reforms have met with some success, the issue of an adequate structure of incentives for SOEs remains unresolved.     

The output efficiency of minority-owned banks in the United States

This study extends prior research on minority-owned banks by examining their output performance. Using a deterministic output distance function, both technical and allocative efficiency are measured. The findings indicate that, with a given set of inputs, minority-owned banks produce less outputs than a comparable group of nonminority-owned banks. Also, both minority-owned banks and nonminority-owned banks fail to allocate outputs in revenue-maximing proportions.     

The financial and economic performance of social banks

ABSTRACT

The financial crisis of 2008 provides evidence for the instability of the conventional banking system. Social banks may present a viable alternative for conventional banks. This article analyses the performance of social banks related to the bank business model, economic efficiency, asset quality, and stability by comparing social banks with banks where the difference is likely to be large, namely with the 30 global systemically important banks (G-SIBs) of the Financial Stability Board over the period 2000–2014. We also analyse the relative impact of the global financial crisis on the bank performance. The performance of social banks and G-SIBs is surprisingly similar.     

Does licensing promote innovation?

ABSTRACT

We analyse the impact of licensing on the equilibrium amount of cost-reducing innovation under several licensing mechanisms in the case of a duopoly model with heterogeneous firms. Under a wide class of licensing mechanisms, we find that as product substitutability increases, the possibility of higher innovation under licensing compared to no licensing decreases. Therefore, firms’ heterogeneity is crucial to assess whether licensing incentivizes or not R&D cost-reducing investments.     

Producing Airpower: The Rise and Fall of Neo-Liberalism’s Defence Agenda

ABSTRACT

Few policy issues are more challenging than complex weaponry’s procurement and employment. Technology drives weapon costs upwards faster than economies are growing and militaries struggle to maintain increasingly sophisticated arms. Certain governments have adopted a reform agenda rooted in neo-liberal economic theory to address these challenges. Two broad policies – enhancing inter-firm competition for contracts and outsourcing activities to the private sector – emerged as central to this reform agenda. Although rarely presented as such, these reforms present a significant intellectual challenge to the hitherto predominant statist model for military power’s provision. Surprisingly, in light of neo-liberal policies’ adoption by militarily active states, no study has systematically examined these reforms’ content and impact. My article fills this lacuna by examining the state – the United Kingdom – that most consistently enacted neo-liberal defence reforms. To preview the conclusion, neo-liberal reforms initially generated small initial efficiencies, but then produced significant adverse consequences when pursued beyond a certain minimal level. Britain’s competition policy, for example, ultimately incentivized firms to consolidate into monopolies, which narrowed the scope for future competition and prevented the state from upholding fixed price contracts. Outsourcing, likewise, proved detrimental once policymakers sought to extend its scope beyond a limited range of simple services.     

Did the global financial crisis alter the competitive conditions in the Indian banking industry?

This article addresses a pertinent research question: Did the global financial crisis alter the competitive conditions in the Indian banking industry? In order to find the answer of this research question, we applied a dynamic version of the non-structural Panzar-Rosse model on a unique unbalanced panel dataset of Indian banks spanning over the period from 1998/99 to 2015/16. The robust estimates of H-statistic computed on the basis of the generalized method of moments estimates of the elasticities of input prices show that (i) Indian banks earned their interest and total revenue under monopolistic competition throughout the whole of the sample period and (ii) the global financial crisis altered the competitive conditions in the banking industry, and market moved closer to perfect competition following the financial crisis, especially when interest-bearing activities were in focus.     

Intellectual capital and firm performance: evidence from Indian banking sector

In the aftermath of the 2008 financial crisis, the entire Indian banking industry was paralysed and their performance was shattered by the unfolding of enormous cases of Non-performing Assets (NPA). The study estimates the operating efficiency of 40 Indian banks for 5 years (2011–15) as a proxy of performance measure using the output-oriented DEA-BCC model. We find that nearly 62% of the state-owned banks and 47% of the private banks are inefficient indicating that the inefficient banks need to reduce their inputs or improve their output to become efficient. The study further investigates the relationship between intellectual capital (IC) and bank performance using a truncated regression model. The regression results show that out of the three components of intellectual capital, only human capital efficiency is positively and significantly associated with operational efficiency while structural capital and finance capital have a negative impact on the efficiency of banks. The study concludes that to achieve competitive edge banks should invest in their human capital. The results are robust in the case of financial variables taken as a proxy for performance.