Estimating the speed of adjustment of European banking efficiency under a quadratic loss function

This paper investigates the speed of adjustment of cost efficiency to equilibrium level in the European banking industry. Our analysis provides for the first time insights into the process of convergence across European banking markets as measured by the speed of adjustment of cost efficiency. In particular, we employ a quadratic loss function specification based on forward-looking rational expectations to model the underlying dynamics of efficiency scores in the banking industry of the EU-15 region over the period 1998–2005. Results show that there is considerable variation in the speed of adjustment across banking systems, while over time it appears that continuing efforts to advance financial integration have led to some improvement in the speed of adjustment to the long-run equilibrium.     

Supervision and cost efficiency in banking

This paper suggests a link between bank operating efficiency and federal supervisor. Since supervisory priorities can vary by the context in which the supervisor was conceived, resulting differences in supervisory policies and procedures may underlay differences in the operating efficiency of their supervised banks. The effect on bank operating expenses is estimated at the individual bank level for each of four size strata using a translog cost function, controlling for bank characteristics and the impact of scale and scope economies. Results generally support a conclusion that bank operating cost differences exist by supervisor, except in the largest size stratum.The authors gratefully acknowledge helpful comments and suggestions from Seungmook Choi, Cary Collins, Curt Hunter, Bradford D. Jordan, Richard H. Pettway, John D. Stowe, Larry Wall, and Jim Wansley, and others at the University of Missouri and Northern Illinois University.     

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.

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.     

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.     

Branching and competition in the European banking industry

In this study branching costs and competitiveness of European banks are measured by fitting a monopolistic competition model to a representative sample drawn from nine EEC banking industries in the period from 1990 to 1996. In the theoretical model, banks decide strategically the size of their branching network anticipating the degree of competition faced on interest rates. From the structural equations of the model an econometric test is derived in order to measure branching costs and degree of competition in banking services. The empirical analysis captures their changing over time together with the impact of various European directives aiming at deregulating the banking industry. Furthermore the study shows persistence of segmentation acoss EEC banking industries.     

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).      

Economies of scale and scope in the European banking sector

In this article, using the data of 2008, we try to describe the impact of scale and product differentiation in 282 European banks. While evidence of the economies of scale is less clear, the results obtained using a translogarithmic function system show that significant economies of scope do exist even for new banking products like derivatives.

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.     

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.     

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.     

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.     

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.     

Regulation and efficiency in European insurance markets

With a series of directives completed in 1994 the European Commission tried to open and harmonize national European insurance markets. This has led to considerable deregulation in several countries. This paper surveys pre-1994 regulation in Germany and the UK and the Commission's policy. It argues that it is unlikely that the policy will have a significant impact on direct international competition between European insurance markets, until there is standardization of insurance law. However, the tightly regulated markets will become more like the loosely regulated UK market. The paper evaluates this outcome and concludes that the European Commission's policy may thereby have improved the welfare of insurance buyers in the previously highly regulated countries such as Germany. The paper also uses efficiency-frontier estimation to compare the dispersion of firm efficiencies in the German and British life insurance market. The results support the hypothesis that tighter solvency regulation allows the survival of a larger proportion of higher-cost firms.