The effects of ownership on bank efficiency in Latin America

Abstract

In recent years many countries have privatised their state-owned banks and encouraged foreign investment. This article investigates the roles of state and private ownership and foreign and domestic ownership on the performance of banks across Latin America. Using a range of financial and economic ratios, data envelopment analysis (DEA) and regression modelling, the study reveals that by 2001 there was surprisingly little difference in performance between state-owned and privately-owned banks and between foreign and domestically-owned banks. The study also reports significantly different levels of bank performance in different Latin American countries, suggesting that country differences outweighed ownership differences in explaining performance.

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The Effects of Ownership on Bank Efficiency in Latin America
Journal:Applied Economics
Manuscript ID: APE-06-0217
Journal Selection:Applied Economics
JEL Code:
G21 - Banks|Other Depository Institutions|Mortgages < G2 -
Financial Institutions and Services < G - Financial Economics, G32 -
Financing Policy|Capital and Ownership Structure < G3 - Corporate
Finance and Governance < G - Financial Economics, N26 - Latin
America|Caribbean < N2 - Financial Markets and Institutions < N -
Economic History
Keywords:Latin America, banking efficiency, ownership, performance
Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK
Submitted Manuscript
Author manuscript, published in "Applied Economics 41, 18 (2009) 2353-2368"
peer-00582112, version 1 - 1 Apr 2011
DOI : 10.1080/00036840701222546

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The Effects of Ownership on Bank Efficiency
in Latin America

Abstract
In recent years many countries have privatized their state-owned banks and
encouraged foreign investment. This paper investigates the roles of state and private
ownership and foreign and domestic ownership on the performance of banks across
Latin America. Using a range of financial and economic ratios, data envelopment
analysis and regression modelling, the study reveals that by 2001 there was
surprisingly little difference in performance between state-owned and privately-
owned banks and between foreign and domestically-owned banks. The study also
reports significantly different levels of bank performance in different Latin American
countries, suggesting that country differences outweighed ownership differences in
explaining performance.
JEL classification: G21, G32, N26
Keywords: Latin America, banking efficiency, ownership, performance

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owned versus privately-owned banks in Latin America are compared using cross-
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1. Introduction
Over the last decade, the banking industry in Latin American countries has undergone
significant reforms. Even though the speed of change has differed across Latin
America, the process of financial market liberalization has been common to most of
them1. The reforms have included the encouragement of foreign capital and the
privatization of state-owned banks. There has been an increase in the share of bank
assets owned by foreign investors and a greater proportion of Latin American
banking operated by the private sector. For example, according to Crystal et al.
(2002), the foreign share of assets in Latin American banking has increased by
between 20% and 50% during the last decade in most countries, becoming
approximately 50% in Argentina, Mexico and Venezuela and almost 60% in Peru.
The drivers of reform have included a desire to raise productivity, improve services
and lower costs in financial services provision.
In this paper the performance of foreign-owned versus domestically-owned and state-
sectional data for the year 2001, the latest date for which data were available at the
time of the research. Latin America is defined widely to include South and Central
America including the Caribbean. Ideally, we would also have liked to chart changes

1Cuba is the exception. It remains a centrally-planned economy.
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20 Latin American countries are included in our sample. Also, a number of previous
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in the performance of banks in Latin America under different forms of ownership
during the 1990s. However, this proved not to be possible because of very incomplete
data on ownership for years other than 2001. While a cross-sectional analysis of
performance has limitations, since it does not reveal the dynamics of performance
changes over time, nevertheless it does provide an insight into the results of reforms
in ownership during the 1990s. If ownership change does lead to performance
changes, we might expect to see obvious differences between state and privately-
owned banks and foreign versus domestically-owned banks by 2001.
The outline of the paper is as follows. Section 2 surveys the existing literature on
foreign versus domestic and private versus state ownership and sets out the main
research hypotheses which the literature generates on ownership and performance.
Section 3 discusses the data and performance measures used and Section 4 reports the
empirical results. Section 5 concludes the paper and identifies the implications of the
findings for future research. This paper contributes to knowledge by analyzing the
efficiency of banks under different forms of ownership across a large region. In total
studies examining bank efficiency have not taken into account the environment in
which they operate and this may be expected to impact on performance. In this study
we attempt to control for macroeconomic conditions, industry structure and the legal,
regulatory and governance context in which banks operate across Latin America.
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2. Literature Review and the Research Hypotheses
A number of studies have addressed the subject of efficiency in banking. Most have
been country-level studies with many focusing on the US banking system. A number
of these studies have emphasized the role played by better-quality management of
resources in raising economic performance. For example, management of resources
was found to be more important than scale and scope economies in determining bank
performance by Berger (1993; also see Peristiani, 1996; Berger and Mester, 1997;
Mukherjee et al., 2001; Barr et al., 2002; Akhigbe, 2002). By contrast, there have
been relatively fewer studies concerned with cross-country analyses of bank
efficiency (Berger and Humphrey, 1997). Important exceptions are Allen and Rai
(1996), who tested for input and output inefficiencies in 15 countries, and Altunbas et
al. (2001), who modelled costs using a sample of EU countries. More recently,
Maudos et al. (2002) and Weill (2003) have also examined EU banking and cost and
profit efficiency and Figueira et al. (2004) have compared the performance of Polish
and UK banks.
In particular, there appear to have been very few studies of the performance of banks
in Asia, Africa, Latin America and Central and Eastern Europe. While Claessens and
Glaessner (1998) compared profitability in banking in Asia and Kwan (2003) studied
unit costs in banks in seven Asian countries, the majority of papers have tended to be
mainly descriptive - setting out the kinds of reforms introduced into banking but with
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