Credit quality and technical efficiency in banking

We estimate banks’ technical efficiency using directional distance functions, a generalization of the radial distance functions that allow us to credit banks for their efforts to increase outputs and decrease resource use and bad loans. We find that once bad loans are considered, banks’ efficiency increases significantly. In addition, omitting bad loans may result in the underestimation of the performance of good credit quality banks. These results suggest that a significant aspect of banking production, credit quality, needs to be considered when evaluating banks’ performances for regulatory purposes.     

Network efficiency and the banking system

Inspired by the Coasean “market versus firm” dichotomy, we offer a new definition of efficiency by applying the notions of network cost and network efficiency as developed in complex network theory. Network analysis is relevant for every system of interconnected exchanging agents. One such system is the banking sector. It is showed that the notions hereby presented may improve upon the results of Allen and Gale’s standard model of the interbank market, where banks exchange liquidity and where troubles in a region of the market may lead to systemic collapse.     

The welfare cost of banking regulation

The Basel Accords promote the adoption of capital adequacy requirements to increase the banking sector's stability. Unfortunately, this type of regulation can hamper economic growth by shifting banks' portfolios from more productive, risky investment projects toward less productive but safer projects. This paper introduces banking regulation in an overlapping-generations model and studies how it affects economic growth, banking sector stability, and welfare. In this model, a banking crisis is initiated by an aggregated shock (in the risky sector) in a banking system with implicit bailout, and banking regulation is modeled as a constraint on the maximal share of banks' portfolios that can be allocated to risky assets. This model allows us to evaluate quantitatively the key trade-off, inherent in this type of regulation, between ensuring banking stability and fostering economic growth. The model implies an optimal level of regulation that prevents crises but at the same time is detrimental to growth. We find that the overall effect of optimal regulation on social welfare is positive when productivity shocks are sufficiently high (for example, in the subprime banking crisis episode) and economic agents are sufficiently risk-averse. Finally, we find that there is a trade-off between regulating the economy upfront (i.e. before the shock) and facing the challenge of making a huge bailout after the crisis.     

Technical efficiency in the Chinese banking sector

This paper applies an innovative DEA (Data Envelopment Analysis) model, the Inverse B-convex model, in order to investigate the technical efficiency of a representative sample of Chinese banks. The banks are ranked according to their efficiency over the period 1998-2008. The results paint a mixed picture of the Chinese banks' performance. The influence of firm size and ownership on bank efficiency is not observed. However, the study shows that overall efficiency improved over time, especially after the entry of China into the WTO. Policy implications are derived.     

Environmental determinants of banking efficiency in Austria

The great majority of Austrian banks operate on a regional or local basis and only a few banks provide their services on a national or even international scale. Obviously, the market environments regional or local banks face are different from that of nationwide operating banks. Casual evidence suggests that local markets condition is a very important external determinant of banking efficiency. Thus, not controlling for market conditions may substantially bias the measurement of managerial efficiency particularly of locally operating banks. In this paper we assess the internal technical efficiency (or X-efficiency) of the Austrian banking sector with the focus on environmental and non-controllable factors critical to banking markets. Analytically, we apply a multiple-stage approach based on a slacks-based DEA model (SBM) and a censored regression model, respectively. In order to cope with the inherent dependency problem of DEA-based efficiency analysis when incorporated into regression analysis we apply a Bootstrap estimator. In so doing we attempt to overcome the dependency problem which plagues the power of standard regression analysis based on DEA processed data. The empirical analysis is based on an unbalanced panel of data covering more than 800 Austrian banks ranging over 1995–2002.

Economic reforms,efficiency and productivity in Chinese banking

This paper analyzes the impact of banking reforms on efficiency and total factor productivity (TFP) change in Chinese banking industry. Using an input distance function, we find that joint-equity banks are more efficient than wholly state-owned banks (WSOBs). Furthermore, both WSOBs and joint-equity banks are found to be operating slightly below their optimal size, suggesting potential advantages in expansion of their businesses. Overall, TFP growth was 4.4% per annum for the sample period 1993–2002. Joint-equity banks experienced much higher growth in TFP (5.5% per annum) compared to the WSOBs (1.4% per annum).      

A comparative study of efficiency in European banking

This paper investigates whether there has been an improvement in and convergence of productive efficiency across European banking markets since the creation of the Single Internal Market. Using efficiency measures derived from DEA estimation, the determinants of European bank efficiency are evaluated using the Tobit regression model approach. The established literature on modelling the determinants of bank efficiency is then extended by recognizing the problem of the inherent dependency of DEA efficiency scores when used in regression analysis. To overcome the dependency problem, a bootstrapping technique is applied. Overall, the results suggest that since the EU's Single Market Programme there has been a small improvement in bank efficiency levels, although there is little evidence to suggest that these have converged. The results also suggest that inference on the determinants of bank efficiency drawn from non-bootstrapped regression analysis may be biased and misleading.     

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.     

Market structure, cost of intermediation and profitability in commercial banking

The effects of market structure on the relative cost of intermediation and on profitability of banks are re-examined using market data in a unit banking environment. Unlike earlier studies, market concentration is shown to affect both measures of bank performance.     

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.     

Cost efficiency and banking performances in a partial universal banking system: application of the panel smooth threshold model

This paper studies the cost efficiency of bank in a partial universal banking system (PUBS), Taiwan. Instead of assuming one common technology in the bank cost function, two technologies are assumed to be imbedded in the cost function. Fee revenues are used as threshold to divide the banks into two technologies. A bank whose fee revenues exceeding the threshold is designated as universal bank technology while falling below the threshold is designated as traditional deposit-loan technology. The panel smooth transition model is adopted, which allows banks to smoothly adjust between the two technologies. Two criteria are suggested, overbanking and the trend-toward-fee revenues, to assess the new model's performances. With respect to scale economies, the results do find a panel smooth transition model yield more reasonable results than the conventional OLS and random effect of panel data approach. Based on the panel smooth transition model, the optimal fixed asset size is around ten billion New Taiwan dollars.     

The determinants of banking efficiency in Hong Kong 2004-2014

The cost efficiency of the Hong Kong Banking sector over the period 2004–2014 is estimated by data envelopment window analysis. A second stage regression analysis finds that bank size and GDP growth are positively associated with efficiency, whereas revenue diversification and inflation are associated with lower efficiency. Stock exchange listing status is associated with lower efficiency but no clear relationship between measures of market structure and efficiency is found.     

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.     

Competition and efficiency in the MENA banking region: a non-structural DEA approach

The goal of this article is to empirically assess the relationship between competition and efficiency in the banking sector of Middle East and North African (MENA) countries spanning the period 1997–2011. To measure the level of competition, the article estimates the non-structural indicator known as the H-statistic, while the level of bank efficiency is estimated through the nonparametric methodology of the Data Envelopment Analysis (DEA) and the Bootstrap Data Envelopment Analysis (BDEA), respectively. The empirical results are robust under six econometric methodologies, providing sufficient evidence for the presence of a one-way (negative) Granger causality, running from efficiency to competition. The empirical findings lead to the rejection of the ‘Efficient Structure Hypothesis’, implying that increases in competition do not precede increases in cost efficiency.     

Consideration of technological and environmental heterogeneity in cost efficiency analysis

In order to evaluate and compare the efficiency levels across banking industries, we adopt the meta-frontier model that can assess the technological difference among countries. Given the importance of country specific conditions, we include in our analysis the different specificities of each country to incorporate the technological as the environmental differences in the evaluation of banking efficiencies. Using data on the banking industries of several countries in the MENA region, over the period 1991–2011, the results of the efficiency scores corrected by the technological and environmental gap led us to conclude that Egyptian banks are the most efficient in terms of cost compared with banks in other countries. Egyptian banks enjoy a very favourable banking technology. Our results support the hypothesis that traditional techniques of efficiency analysis based on the efficiency scores of a specific and pooled frontier tend to mystify efficiency levels and may incorrectly identify efficient banks. This paper contributes to the efficiency literature by incorporating technological and environmental heterogeneities in the evaluation of efficiency. This helps to characterize the production process of a bank and provides common standards by which the efficiencies of banks in different countries can be compared in a meaningful way with each other.     

Technical efficiency and returns to scale in Austrian commercial banking: 1987–1991

In a pooled time-series cross-section study covering the period 1987–1991, the technical efficiency of Austrian all-purpose banks is analysed. The sample covers banks of all size classes, among them the largest 18 banks as well as some of the very small banks. The empirical results show that local banks and nationwide operating banks are technically most efficient while regional banks are least efficient. Moreover, it can be shown that the technical efficiency of nationwide operating banks improved substantially in the period analysed relative to that of local and regional banks.I wish to thank an anonymous referee for his helpful comments. Financial support from the Vienna Chamber of Commerce is gratefully acknowledged.     

Testing the relationship between competition and efficiency in banking: A panel data analysis

The relationship between competition and efficiency in the banking sectors of five EU countries is investigated using Granger-type causality test estimations. We find positive causation between market power and efficiency, whereas the causality running from efficiency to competition is weak.