Productivity and efficiency at large and community banks in the US: A Bayesian true random effects stochastic distance frontier analysis

This paper compares the productivity and efficiency of large banks and community banks in the United States over the period 1997–2006. This comparison is performed by estimating a true random effects stochastic distance frontier model—a model that is capable of disentangling unobserved heterogeneity from inefficiency—within a Bayesian framework. We find that failure to consider unobserved heterogeneity results in a misleading ranking of banks and mismeasured technical efficiency, productivity growth, and returns to scale. Our results show that, compared with community banks, large banks have experienced much higher productivity growth and higher levels of returns to scale. Our estimates of total factor productivity growth show a clear downward trend for both large and community banks, and our decomposition of the output-distance-function-based Divisia productivity index indicates that technical change is the driving force behind this trend.     

Efficiency,technical change,and returns to scale in large US banks: Panel data evidence from an output distance function satisfying theoretical regularity

This paper provides parametric estimates of technical change, efficiency change, economies of scale, and total factor productivity growth for large banks (those with assets in excess of $1 billion) in the United States, over the period from 2000 to 2005. This is done by estimating an output distance function subject to theoretical regularity within a Bayesian framework. We find that failure to incorporate theoretical regularity conditions results in mismeasured shadow revenue and/or cost shares, which in turn leads to perverse conclusions regarding productivity growth. Our results from the regularity-constrained model show that total factor productivity of the large US banks grew at an average rate of 1.98% over the sample period. However, our estimates also show a clear downward trend in the growth rate of total factor productivity and our decomposition of the primal Divisia total factor productivity growth index into its three components – technical change, efficiency change, and economies of scale – indicates that technical change is the driving force behind this decline.     

Turkish bank efficiency: Bayesian estimation with undesirable outputs

This paper analyzes the productivity and efficiency of Turkish banks from 2002 to 2010. We obtained estimates of efficiency, productivity growth and efficiency growth using a Bayesian stochastic frontier approach and focused on accounting for Non-Performing Loans (NPLs) for use in our model. Specifically, we introduce NPLs as a bad output in an input distance function, and estimate a system of non-linear equations subject to endogeneity. We confirm that the productivity growth of Turkish banks was positive over the period of this study, which was mainly due to the improvement in technology, while efficiency growth continued to be negative over the same period. Methodologically, we also prove that not accounting for NPLs in estimating the frontier model might seriously distort the efficiency and productivity results. The study also provides measures of shadow prices for NPL and discusses the results in terms of several interesting trends in Turkish banking. Finally, the paper provides efficiency and productivity comparisons between domestic and foreign banks.     

Efficiency and productivity growth in the banking industry of Central and Eastern Europe

We employ the directional technology distance function and provide estimates of bank efficiency and productivity change across Central and Eastern European (CEE) countries and across banks with different ownership status for the period 1998–2003. Our results demonstrate the strong links of competition and concentration with bank efficiency. They also show that productivity for the whole region initially declined but has improved more recently with further progress on institutional and structural reforms. Input-biased technical change has been consistently positive throughout the entire period suggesting that the reforms have induced favorable changes in relative input prices and input mix. However we find evidence of diverging trends in productivity growth patterns across banking industries and that foreign banks outperform domestic private and state-owned banks both in terms of efficiency and productivity gains. Overall, we find that productivity change in CEE is driven by technological change rather than efficiency change.     

Productivity growth and biased technological change: Credit banks in Japan

This paper investigates the productivity change of Japanese credit banks with a Malmquist index and the input technological bias during 2000–2006. Our results indicate that the traditional growth accounting method, which assumes Hicks neutral technological change, is not appropriate for analyzing changes in productivity. Our analysis unambiguously shows that management of Shinkin banks has to be improved. These must be based on the improvement of technical efficiency and/or technological change, emulating the procedures of the best-practice banks, i.e., those banks with Malmquist productivity scores higher than one and simultaneously with technical efficiency and technological change higher than one.     

Regulations and Productivity Growth in Banking: Evidence from Transition Economies

This paper examines the relationship between the regulatory and supervision framework, and the productivity of banks in 22 countries over the period 1999–2009. We follow a semiparametric two‐step approach that combines Malmquist index estimates with bootstrap regressions. The results indicate that regulations and incentives that promote private monitoring (PMON) have a positive impact on productivity. Restrictions on banks’ activities relating to their involvement in securities, insurance, real estate, and ownership of nonfinancial firms also have a positive impact. Regulations relating to the first and second pillars of Basel II, namely, capital requirements (CAPR) and official supervisory power (SPR) do not have, in general, a statistically significant impact on productivity over the study period although they appear to gain in importance following the onset of the financial crisis in 2007. The latter finding indicates that stringent capital and supervisory standards have positive productivity effects when financial pressures peak. Our results are robust when controlling for various country‐specific features and alternative estimation approaches.     

Indian bank efficiency and productivity changes with undesirable outputs: A disaggregated approach

The objective of this study is to examine technical efficiency and productivity growth in the Indian banking sector over the period from 2004 to 2011. We apply an innovative methodological approach introduced by Chen et al. (2011) and Barros et al. (2012), who use a weighted Russell directional distance model to measure technical inefficiency. We further modify and extend that model to measure TFP change with NPLs. We find that the inefficiency levels are significantly different among the three ownership structure of banks in India. Foreign banks have strong market position in India and they pull the production frontier in a more efficient direction. SPBs and domestic private banks show considerably higher inefficiency. We conclude that the restructuring policy applied in the late 1990s and early 2000s by the Indian government has not had a long-lasting effect.     

Bank efficiency in the new European Union member states: Is there convergence?

We employ the stochastic frontier approach and estimate a common frontier in order to examine cost and profit efficiency in the banking systems of the ten new European Union member states over the period 1998-2003. The results indicate a generally low level of cost and an even lower level of profit efficiency, whilst we do not observe marked differences of inefficiency scores across countries. Foreign banks outperform both state-owned and domestic private-owned banks in terms of profit efficiency, though results are less clear in the case of cost efficiency. In addition, β- and σ-convergence criteria indicate some convergence in cost efficiency across the new member states, yet no convergence appears to have been achieved in terms of profit efficiency.     

Is the information produced in the stock market useful for depositors?

The information produced by sophisticated investors in the stock market may be useful for uninformed depositors. Since much information is not produced for Shinkin banks (cooperatives) in Japan, relying on the information from the stock market may be an efficient decision for these depositors. This paper provides empirical evidence that Shinkin depositors seemed to withdraw funds after observing a fall in the stock prices of other banks.     

The level and quality of Value-at-Risk disclosure by commercial banks

In this paper we study both the level of Value-at-Risk (VaR) disclosure and the accuracy of the disclosed VaR figures for a sample of US and international commercial banks. To measure the level of VaR disclosures, we develop a VaR Disclosure Index that captures many different facets of market risk disclosure. Using panel data over the period 1996–2005, we find an overall upward trend in the quantity of information released to the public. We also find that Historical Simulation is by far the most popular VaR method. We assess the accuracy of VaR figures by studying the number of VaR exceedances and whether actual daily VaRs contain information about the volatility of subsequent trading revenues. Unlike the level of VaR disclosure, the quality of VaR disclosure shows no sign of improvement over time. We find that VaR computed using Historical Simulation contains very little information about future volatility.     

Differential impact of Korean banking system reforms on bank productivity

We study the impact of banking system reforms during a crisis following a period of undisciplined lending. Regulatory changes aimed at strengthening the banks’ capital structure and risk management practices do not have a uniform impact on bank productivity, but rather favor financially sound or strategically privileged banks. We present evidence documenting the differential impact of regulatory reforms on Korean commercial bank productivity over the period 1995–2005. Average technical efficiency of banks decreased during the financial crisis of 1997–1998. It improved following the subsequent bank restructuring and continued to improve through 2005. The capital adequacy ratio is positively associated with banks’ technical efficiency. The non-performing loans ratio is negatively associated with technical efficiency. Both relationships are accentuated during the crisis but attenuated after the reforms.     

Bank efficiency,productivity, and convergence in EU countries: a weighted Russell directional distance model

The objective of this study is three-fold. First we estimate and analyse bank efficiency and productivity changes in the EU28 countries with the application of a novel approach, a weighted Russell directional distance model. Second, we take a disaggregated approach and analyse the contribution of the individual bank inputs on bank efficiency and productivity growth. Third, we test for convergence in EU28 bank productivity as well as in the inefficiency of individual bank inputs. We find that bank efficiency has been undermined by the financial crisis in banks notably from the EU15 countries. We also argue that bank efficiency and productivity in EU countries vary across the banking sector with banks from the ‘old’ EU showing higher efficiency levels. Nonetheless, a noticeable catching up process is observed for banks from the ‘new’ EU countries. Consequently, we do not find evidence of group convergence for bank productivity but there is evidence of convergence in bank efficiency change and technical change among the EU28 countries throughout the period 2005–2014. The driving force seems to be convergent technical change from the old EU member states’ banks. On the other hand, almost no convergence is detected for the banks’ individual inputs while the transition paths show heightened diversity during the crisis years.     

Incorporating risk input into the analysis of bank productivity: Application to the Taiwanese banking industry

This study reappraises banks’ productivity by using 42 Taiwanese banks during 1999–2007 as observations. It introduces an input-oriented generalized metafrontier Malmquist productivity index (I-gMMPI), while considering the latent effect of risk-taking behavior in the analytic framework. We learn that public and private banks should face separate short-term technological frontiers, while the econometric model considering risk input can portray banks’ operating frontiers better. Moreover, neglecting the influence of risk input would bring about distortions of efficiency, technology and TFP dynamic estimations for banks; meanwhile, the degree of scale economies would also be overestimated. The paper concludes that neglecting the risk-taking essence in bank performance evaluation is equal to allowing banks to barter risk-bearing as the term for further output growth. Consequently, the potential cost is that banks may excessively aggrandize their scales of business, implying the possibility of another financial crisis.     

Firm growth and efficiency in the banking industry: A new test of the efficient structure hypothesis

In this paper we propose a new test of the efficient structure (ES) hypothesis, which predicts that efficient firms come out ahead in competition and grow as a result. Our test has significant advantages over existing ones, because it is more direct, and can jointly test the so-called quiet-life hypothesis, which predicts that in a concentrated market firms do not minimize costs. We then apply this test to large banks in Japan. Consistent with the ES hypothesis, we find that more efficient banks become larger. We also find that market concentration reduces banks’ efficiency, which supports the quiet-life hypothesis. These findings imply that there is an intriguing growth–efficiency dynamic throughout banks’ life cycle, although our findings also suggest that the ES hypothesis dominates the quiet-life hypothesis in terms of economic impact.     

Banking efficiency and stock market performance: an analysis of listed Indonesian banks

The main purpose of this paper is to examine the monthly profit-based technical efficiency and productivity of listed Indonesian banks and their market performance. We examined the banks through the prism of two modelling techniques, efficiency and super-efficiency, over the period January 2003 to end-July 2007. Within this research strategy we employed Tone??s (2001) non-parametric, Slacks-Based Model (SBM) and Tone??s (2002) super-efficiency SBM to estimate the bank efficiencies. They were then combined with recent bootstrapping techniques, namely the non-parametric truncated regression analysis suggested by Simar and Wilson (2007), to identify the determinants of the efficiency scores. With respect to the latter, in the case of the SBM efficiency scores, the Simar and Wilson methodology was adapted to two truncations, whereas in the super-efficiency framework the original technique was utilised. The first part of the analysis reveals that listed banks?? average efficiencies varied widely over the sample period, from a low of 34% to a high of 97%, with only one bank having a score in excess of unity under the super-efficiency framework. The two most efficient banks were domestically owned. With respect to the truncated regression analysis, we found that the banks?? efficiency scores were positively correlated with share prices and return on equity in all models, and with the log of total assets in the super-efficiency analysis. Moreover, it was found that the JCI index of the Indonesian Stock Exchange is positively related to bank efficiency in all models. Another interesting finding is that the coefficient for the share of foreign ownership is negative and statistically significant in the super-efficiency modelling. This suggests that Indonesian banks with foreign ownership tend to be less efficient than their domestic counterparts. Finally, Malmquist productivity results suggest that, over the study??s horizon, the sample banks displayed volatile productivity patterns in their profit-generating operations.     

First Financial Restructuring and operating efficiency: Evidence from Taiwanese commercial banks

This paper investigates the effect of the “First Financial Restructuring” (FFR) on the operating efficiency of commercial banks in Taiwan. Applying data envelopment analysis (DEA) to operations data for 40 commercial banks over the 6-year period 2000–2005, we find that while the banks have lower operating efficiency on average during the reform period (2002–2003) compared to the pre-reform period (2000–2001), improved operating efficiency is reflected in the post-reform period (2004–2005). Our results remain unchanged even after controlling for the non-performing loan ratio, capital adequacy ratio, bank ownership, size, and GDP growth rate. These results suggest that the improved efficiency in the post-reform period is possibly due to enhanced banking and risk management practices and benefits obtained from compliance with the FFR.     

Foreign bank entry,credit allocation and lending rates in emerging markets: Empirical evidence from Poland

Earlier studies have documented that foreign banks charge lower lending rates and interest spreads than domestic banks. We hypothesize that this may stem from the superior efficiency of foreign entrants that they decide to pass onto borrowers (“performance hypothesis”), but could also reflect a different loan allocation with respect to borrower transparency, loan maturity and currency (“portfolio composition hypothesis”). We are able to differentiate between the above hypotheses thanks to a novel dataset containing detailed bank-specific information for the Polish banking industry. Our findings demonstrate that banks differ significantly in terms of portfolio composition and we attest to the “portfolio composition hypothesis” by showing that, having controlled for portfolio composition, there are no differences in lending rates between banks.     

The evolution of cost-productivity and efficiency among US credit unions

Advances in information-processing technology have eroded the advantages of small scale and proximity to customers that traditionally enabled small lenders to thrive. Nonetheless, the membership and market share of US credit unions have increased, though their average size has also risen. We investigate changes in the efficiency and productivity of US credit unions during 1989–2006 by benchmarking the performance of individual firms against an estimated order-α quantile lying “near” the efficient frontier. We construct a cost analog of the Malmquist productivity index, which we decompose to estimate changes in cost and scale efficiency, and changes in technology. We find that cost-productivity fell on average across all credit unions but especially among smaller credit unions. Smaller credit unions confronted a shift in technology that increased the minimum cost required to produce given amounts of output. All but the largest credit unions also became less scale efficient over time.     

The Dependency of the Banks' Assets and Liabilities: Evidence from Germany

Two decades of developments in risk‐transfer instruments may have fundamentally changed the extent to which banks practice on‐balance sheet term and liquidity transformation. These changes should be deliberated in on‐balance sheet asset‐liability dependencies. By using correlation analyses, we investigate asset‐liability dependency for all three sectors of German universal banks from 1994 to 2007 and find that it declined over our sample period. We also investigate whether asset‐liability dependency varies systematically with a bank's affinity for using risk‐transfer instruments, regulatory capital, and profitability and document several differences between the three sectors of German universal banks.     

Financial reforms and technical efficiency in Indian commercial banking: A generalized stochastic frontier analysis

In this study we estimate technical efficiency of Indian commercial banks from 1989 to 2009, using a multiple-output generalized stochastic production frontier and analyze the effects of financial reforms on estimated efficiency. The generalized method estimates technical efficiency in the presence of multiple outputs, filling a gap in the existing literature. Our results show that Indian commercial banks were operating with 64% efficiency on average during the sample period. The initial phase of reform had a positive impact on while the later phase adversely affected technical efficiency of banks. Public sector banks show higher efficiency levels compared to private and foreign banks.