Evolution of banking efficiency within an unstable macroeconomic environment: the case of Turkish commercial banks

This paper analyses the efficiency performance of the Turkish banking sector between 1988 and 1999, a period characterized by increasing macroeconomic instability. The technical and scale efficiencies of Turkish commercial banks are measured with the use of nonparametric Data Envelopment Analysis. The empirical results suggest that over the sample period both pure technical and scale efficiency measures show a great variation and the sector did not achieve sustained efficiency gains. It is also reported that the sector suffers mainly from scale inefficiency and scale inefficiency, in turn, is due to decreasing returns to scale. There are also reported differences in the efficiency performance of commercial banks with different ownership status. In addition, the relationships between profitability, asset quality, size and the two definitions of efficiency are considered. Efficient banks are more profitable, and pure technical efficiency and scale inefficiency are positively related to size. The trend in the performance levels over the period suggests that macroeconomic conditions had a profound influence on the efficiency measures.     

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.     

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.     

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.     

Efficiency in the factoring industry

The efficiency and productivity in the Italian factoring industry between 1993 and 1997 is investigated using DEA. The factoring industry is an important part of many financial systems and it has established itself as a major source of finance and credit management for a growing number of companies. However, as far as the authors are aware no studies have applied frontier methodologies to examine the efficiency and productivity of this industry. This paper focuses on the Italian market, the second largest in the world after the UK. The results suggest that there are substantial cost savings to be had in the Italian factoring industry: the mean cost inefficiency in the Italian factoring industry over the period 1993–1997 ranged between 14% and 22%. These inefficiencies are mainly generated by allocative rather than technical inefficiencies. Scale and technical inefficiencies seem to be similar in magnitude and the supposed importance of the latter typically found in the banking efficiency literature, are not observed in Italian factoring. Firm size does not appear to be related to technical, allocative and economic efficiency and the hypothesis that ownership structure influences factoring firm efficiency could not be rejected. In order to analyse efficiency change over time the Malmquist index is used. Total factor productivity was decomposed into technical change and efficiency change and the latter was further divided into pure efficiency and scale efficiency change. Productivity changes were slight over the period 1993–1996, while a substantial increase in productivity occurred between 1996 and 1997: the latter appears to be the result of a large improvement in the technology and a positive scale efficiency change, however, this was slowed down by a negative pure efficiency change.     

Cost metafrontier approach for measuring the Malmquist productivity index: An example of bank groups formed after the financial reform in Taiwan

This study attempts to provide a framework under the variable returns to scale hypothesis to account for the effect of the cost scale efficiency change in the decomposition of the cost metafrontier Malmquist productivity index (CMMPI). In addition, the meta‐cost efficiency and cost frontier gap between subordinate banks of financial holding companies (FHC) and independent banks are also examined. A total of 34 banks in Taiwan are empirically analysed from 1999 to 2012. The results indicate that the meta‐cost efficiency, meta‐technical efficiency and meta‐allocative efficiency scores of subordinate banks of FHC are better than those of independent banks. The banking industry in Taiwan is found to have an improvement in cost metafrontier Malmquist productivity. The subordinate banks of FHC are also found to exhibit positive CMMPI and decomposition components, but do not achieve a significant improvement except in the case of the technical gap ratio change. The empirical results recommend that Taiwanese banks place more policy focus on the issue of scale adjustment, which should be beneficial. Based on the CMMPI decomposed results, we can gain further understanding of the growth path to enhance operational performance.     

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.     

Financial liberalization and bank efficiency: a comparative analysis of India and Pakistan

This paper provides a comparative analysis of the evolution of the technical efficiency of commercial banks in India and Pakistan during 1988–1998, a period characterized by far-reaching changes in the banking industry brought about by financial liberalization. Data Envelopment Analysis is applied to two alternative input–output specifications to measure technical efficiency, and to decompose technical efficiency into its two components, pure technical efficiency and scale efficiency. The consistency of the estimated efficiency scores are checked by examining their relationship with three traditional non-frontier measures of bank performance. In addition, the relationship between bank size and technical efficiency is examined. It is found that the overall technical efficiency of the banking industry of both countries improved gradually over the years, especially after 1995. Unlike public sector banks in India, public sector banks in Pakistan witnessed improvement in scale efficiency only. It is also found that banks are relatively more efficient in generating earning assets than in generating income. This is attributed to the presence of high non-performing loans. In addition, it is found that the gap between the pure technical efficiency of different size groups has declined over the years.     

Re‐Examining the Technical Efficiency of Australian Banks: A Bootstrap DEA Approach

This study re‐examines both pure technical and scale efficiency of Australian banks using bootstrap data envelopment analysis (DEA). The aim is to improve the choice of variables of the core profit efficiency model which is commonly used in earlier Australian banking efficiency studies. After we introduce the “interest income” over “net interest income” variable in the core profit efficiency model, the proportion of fully pure technical efficient banks decreased to 23% which is significantly lower than 81% which was reported in a recent study. This research argues that the main issue that has contributed to this difference is that improving the choice of variables significantly increases the discriminatory power of efficiency estimates. Additionally, emphasising on statistical properties of efficiency estimates, this study employs bootstrap DEA to provide confidence intervals and bias corrected estimates of pure technical efficiency scores of the sample banks. The bootstrap results show the importance of incorporating sample variation and bias in estimating efficiency scores. Earlier Australian banking efficiency studies ignored such issues. The new findings from the sample banks could have important implications for the banking industry in Australia.     

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.     

Cost and profit efficiencies in transition banking: the case of new EU members

This paper analyses cost and profit efficiencies in commercial banking in the eight Central and Eastern European countries that became new members to the European Union. Common stochastic cost and profit frontiers with country-specific variables are employed in order to take into account macro-economic and financial sector conditions that vary over time and across countries. The impact of foreign ownership on performance is also examined. The results indicate a wide range of cost and profit inefficiency scores across countries and across different size groups. All banking systems in the sample display significant levels of cost and profit inefficiency and there does not seem to be any continuous improvement in performance over time. There is also some evidence that foreign banks perform, on average, better than domestic banks.     

Performance of Thailand banks after the 1997 East Asian financial crisis

The performance of commercial banks and government-owned specialized banks in Thailand is estimated after the 1997 East Asian financial crisis. Commercial banks exhibit increasing returns to scale, whereas government-owned specialized banks exhibit decreasing returns to scale, implying further increases in bank size and market concentration in the commercial bank sector but not for government specialized banks. Cost inefficiency varies by bank and is a function of the ratio of nonperforming loans (NPLs) to total loans, equity to total assets and liquid assets to total assets, as well as the number of branches. On average, banks with fewer NPLs, that are well capitalized and with adequate liquidity are efficient. Thus, stricter rules to regulate credit risk management and ensure capital and liquidity adequacy would enhance efficiency in the banking sector. Although estimated input substitutability appears to be low, labour and loanable fund are substitutes. However, labour and physical capital as well as physical and loanable funds are complements in commercial banks. All the three inputs of labour, physical capital and loanable funds are substitutes for the government specialized banks.     

Analysis of production efficiency of beef cow/calf farms in Alberta

This article measures production efficiency across cow–calf farms in Alberta, and examines the sources of variation in efficiency. Average technical, allocative and economic efficiencies are, respectively, 83%, 78% and 67%. Biological efficiency (increased conception, calving and weaning rates), larger herd size, higher share of family labour and greater expense for bedding material reduce inefficiency. Inefficiency was also related to receipt of government subsidies.     

国有商业银行与股份制商业银行生产效率的比较研究

本文采用基于投入的DEA方法 ,比较了加入WTO之前我国国有商业银行与股份制商业银行的生产效率。我们把存款当作产出 ,选取 1999年～ 2 0 0 1年十四家全国性商业银行为样本 ,计算出银行的技术效率 ,并将技术效率分解为纯技术效率和规模效率 ,确定银行的规模报酬变化。我们从银行的技术有效性、整体效率、技术无效性原因和规模报酬四个方面对国有和股份制商业银行进行了比较分析 ,研究国有商业银行与股份制商业银行之间的差距 ,并分析了原因。     

Regulation and efficiency in transition: the case of Romanian banks

Using disaggregated panel data for the period 1996–2002, this paper estimates the cost efficiency of Romanian banks and relates it to regulation implemented by the National Bank of Romania. We estimate efficiency using a model that combines the frameworks of both stochastic frontier analysis and shadow cost functions. Our results indicate that, for all types of banks, the cost of technical inefficiency decreases in the years following tightening of regulation. A significant part of this decrease can be attributed to the policy change. Overall, the short-run increase in cost due to additional regulation exceeds the benefits from reduced technical inefficiency. However, our model does not account for other benefits, besides changes in X-inefficiency, such as stability of the banking system, which may be significant.      

Comparing French and US hospital technologies: a directional input distance function approach

French and US hospital technologies are compared using directional input distance functions. The aggregation properties of the directional distance function allow comparison of hospital industry-level performance as well as standard firm-level performance with regard to productive efficiency. In addition, the underlying constituents of efficiency?–?in the short run, congestion and technical inefficiency, and in the long run, scale inefficiency?–?are analysed by decomposing the overall measure. By virtue of using the directional distance function, it is also possible to obtain an estimate of a lower bound on allocative inefficiency. It is found that French and US hospitals use quite different technologies. Long run scale inefficiencies cause most of the French hospitals’?inefficiency, while short run technical inefficiency is the main source of overall productive inefficiency in the US hospitals.     

中国粮食生产资源配置效率及其区域差异——基于动态Malmquist指数的经验

提高生活水平是人类社会永恒的主题,而资源配置的有效性是保证这一主题实现的必要手段。文章基于非参数生产前沿面理论,将资源配置效率分解为规模效率、纯技术效率和要素可处置度,分析中国粮食流通体制市场化以来,粮食生产资源配置效率及其时空特征、变化态势以及主要制约因素。结果表明,全国及其三大流域粮食生产资源投入要素并没有得到充分利用;但中国粮食生产资源配置效率的平均水平是上升和改善的;中国及其三大流域制约粮食生产资源配置效率的因素是产出规模效率。因此,政府应该加大力度以提高粮食生产资源配置效率,加快农业剩余劳动力转移,有效消除制约中国粮食生产资源配置效率的因素,最大程度地发挥规模效益;同时还应根据市场化进程中我国粮食生产所表现出来的新特点,适时做出进一步激励粮食生产、最大程度提高资源配置效率的政策安排,同时这也是弥补市场失灵、稳定粮价、促进粮食高产稳产的有效手段。     

Efficiency and productivity of the food and beverage listed firms in the pre-recession and recessionary periods in Greece

This study uses data envelopment analysis to examine the liquidity and sales efficiency of the Food and Beverage listed firms in Athens Exchange in the period 2006–2012. The liquidity efficiency of the firms is higher than the sales efficiency but the results indicate that there are not statistical significant differences in the rankings estimated by the two models in each period. The Malmquist Productivity Index reveals that over the period of the study, firms have experienced an annual average increase in productivity of 0.5% (a slight progress). On examining the components of this productivity change, it becomes evident that firms have experienced an annual average of 2% increase in technology combined with a decrease in technical efficiency of –1.5%. The results indicate that 52.4% of the firms experienced productivity gains in the examined period, and this was mainly the result of technological gain rather than efficiency improvement. More than 90% of the firms in the sample shift the efficiency frontier and only 33.3% of the firms are catching up, improving their productivity by reducing inefficiency. Moreover, the empirical study reveals that the overall technical inefficiencies of the firms are primarily caused by pure technical inefficiencies rather than scale inefficiencies.     

Cost structures of banks grouped by strategic conduct

The hypothesis that the banking system consists of firms that use the same production technology is tested and rejected in this study. Six groupings of the population of commercial banks are identified using cluster analysis. The banks are grouped to reflect similar production technologies within groups but different technologies across groups as defined by the strategic conduct (i.e., activities) of the banks. The results suggest that banks in different clusters employ production processes that feature different degrees of substitutability between factors of production, and that the estimates of input substitutability for those groups look quite different from those estimated based on the full population of commercial banks. The impact of the homogeneity production technology assumption on the measurement of cost efficiency is also assessed. The results show that partitioning the industry by strategic conduct reduces the average inefficiency in the industry. These results support those found by others who used similar partitioning criteria but a more narrowly defined sample of banks.     

Pre-recession efficiencies and input allocation decisions of agricultural and critically insolvent banks

The late 2000s’ economic recession is considered the longest economic downturn since the 1930s Great Depression. Declining real estate values ignited an increase in loan defaults and mortgage foreclosures that led to a surge of bank failures at a rate not experienced by the U.S. banking industry since the 1980s. A total of 509 bank failures were recorded by the FDIC from January 2007–December 2014, with nearly 60% of these failures occurring in 2009 and 2010. In contrast, there were only 24 bank failures in the U.S. during the 7-year period prior to 2007. This study analyzed certain components of operating decisions made by banks that either survived or became critically insolvent during the late 2000s financial crisis using an Input Distance Stochastic Frontier function to estimate the technical efficiency (TE) and allocative efficiency (AE) between agricultural banks and non-agricultural banks. This efficiency analysis was applied to a 7-year pre-recession period and is designed to final out any early warning signals that decrease the efficiency level of banks. Results suggest that survival banks were more technically efficient than critically insolvent banks, and banks’ tendency to utilize cheaper inputs were more likely to stand the economic crisis.