Identifying bank outputs and inputs with a directional technology distance function |
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Authors: | Paolo Guarda Abdelaziz Rouabah Michael Vardanyan |
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Institution: | 1. Banque Centrale du Luxembourg, 2, Boulevard Royale, 2983, Luxembourg City, Luxembourg 2. IéSEG School of Management, Lille Economics and Management (UMR CNRS 8179), Socle de la Grande Arche, 1, Parvis de la Défense, 92044, Paris La Défense Cedex, France
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Abstract: | The bank efficiency literature lacks an agreed definition of bank outputs and inputs. This is problematic given the long-standing controversy concerning the status of deposits, but also because bank efficiency estimates are known to be affected by the inclusion of additional outputs such as non-traditional (fee-based) activities or risk measures. This paper proposes a data-driven identification of bank outputs and inputs using the directional technology distance function. While previous applications of this tool used symmetric expansion or contraction directions, we focus on a set of orthogonal directions, each corresponding to an assumption on the input/output status of an individual variable. These directions correspond to a set of different specifications, whose estimated coefficients can be used to determine the input or output status of all variables except the regressand. Our empirical analysis revealed a very consistent pattern across the alternative specifications estimated. There is strong evidence that customer deposits are an input, and that non-performing loans are an important undesirable output. Finally, the orthogonal expansions/contractions we consider avoid the simultaneity problem raised by the “convenient normalization” commonly used to impose linear homogeneity in stochastic frontier estimation. |
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