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A comparative study of the cost efficiency of Italian bank conglomerates
Abstract
Outlines previous research on the efficiency of the Italian banking system, describes the structure of Italian banking groups and uses parametric (stochastic cost frontier) and non-parametric (data envelopment analysis) approaches to assess the efficiency of Italian bank conglomerates in 1995 compared with the parent companies and subsidiearies. Explains the methodology and presents the results, which suggest that parent companies and subsidiaries are more efficient than groups and that efficiency is not related to size. Analyses efficiencies of scale and scope to show that bank groups gain more economies of scope than parents or subsidiaries; but finds mixed results for economies of scale.
... Various estimators have been proposed in the performance assessment of banks including: SFA of Aigner et al. (1977) and Meeusen and Van den Broeck (1977); DEA of Charnes et al. (1978), Banker et al. (1984), and Charnes et al. (1985); thick frontier analysis of Berger and Humphrey (1992); distribution free approach of Berger (1993); free disposal hull of Chang (1999); semiparametric approach of Kuosmanen and Kortelainen (2010), Badunenko et al. (2012) and Tsionas (2017). However, the estimator methods, SFA and DEA, have been the two most widely used approaches to modern benchmarking (Ferrier and Lovell, 1990;Resti, 1997;Bauer et al., 1998;Casu;Girardone, 2002;Fiorentino et al., 2006;Wheelock and Wilson, 2007;Tabak et al., 2014;Dong et al., 2014;. ...
... Various estimators have been proposed in the performance assessment of banks including: SFA of Aigner et al. (1977) and Meeusen and Van den Broeck (1977); DEA of Charnes et al. (1978), Banker et al. (1984), and Charnes et al. (1985); thick frontier analysis of Berger and Humphrey (1992); distribution free approach of Berger (1993); free disposal hull of Chang (1999); semiparametric approach of Kuosmanen and Kortelainen (2010), Badunenko et al. (2012) and Tsionas (2017). However, the estimator methods, SFA and DEA, have been the two most widely used approaches to modern benchmarking (Ferrier and Lovell, 1990;Resti, 1997;Bauer et al., 1998;Casu;Girardone, 2002;Fiorentino et al., 2006;Wheelock and Wilson, 2007;Tabak et al., 2014;Dong et al., 2014;. ...
... Bank efficiency studies utilizing both the DEA and SFA models are abundant (Ferrier and Lovell, 1990;Resti, 1997;Bauer et al., 1998;Casu and Girardone, 2002;Fiorentino et al., 2006;Tabak et al., 2014;Dong et al., 2014). In the presence of widespread or heterogeneous banks, SFA and DEA models provide biased efficiency measures (Thanassoulis, 1996). ...
Purpose
The consistency of stochastic frontier analysis (SFA) and data envelopment analysis (DEA) cost efficiency measures using a sample of 650 commercial and domestic banks in the United States is investigated based on cluster analysis while accounting for the yearly variation in banks.
Design/methodology/approach
Due to the importance of efficiency measures for policy and managerial decision-making, the cost efficiency measures of SFA and DEA estimators are examined according to four criteria: levels, rankings, stability over time and stability over clustering groups. In this paper, we present two clustering methods, Gap Statistic and Dindex, that involve SFA and DEA cost efficiency measures. The clustering approach creates homogeneous groups of banks offering a similar mix of efficiency levels. Hence, each evaluated bank knows the cluster to which it belongs. Furthermore, this paper provides nonparametric statistical tests of SFA and DEA cost efficiency measures estimated with and without a clustering approach.
Findings
The results suggest that the clustering approach plays a considerable role in the rankings of US banks. Furthermore, the average SFA and DEA cost efficiency measures over time of the homogeneous US banks are substantially higher than those of the heterogeneous US banks.
Originality/value
This research is the first to provide comparative efficiency measures needed for desirable policy conclusions of heterogeneous and homogeneous US banks.
... Italian studies number on banking efficiency are not high being investigated in nineties with reference to the determinants as scale inefficiencies and regional disparities (Favero-Papi, 1995 andResti, 1997), with reference to IT influence (Casolaro and Gobbi, 2007) and Italian cooperative banks (Barra et al, 2013). Other Italian and European scholars compared results obtained in different countries (Lozano-Vivas, 1997) investigating scope economies and efficiency of conglomerates (Casu and Girardone, 2002) but most of them focusing on commercial banks, while fewer examining SBs efficiency. ...
... Berger and Humphrey (1997) reviewed 130 studies of efficiency of financial institutions and classified them following the parametric and non parametric technical approach and Bauer et al. (1998) investigate the stochastic frontier approach (SFA), thick frontier approach (TFA) and distribution free approach (DFA) as the nonparametric DEA, free disposal hull (FDH) showing that DEA is able to provide a better stability. From Casu and Girardone (2002) point of view SFA, DFA and DEA efficiency estimates are consistent with the DEA scores rather than with the SFA. ...
Savings Banks are part of the European banking-sector, which play a leading role in providing the financial support for the recovery and development of the real economy. SBs are supporting, mainly, local investments being born within a context that had as primary objective the aim to support local economies and being the profit just one (not even a core one) of the purposes. Currently they operate under complete commercial principles. We investigates the efficiency of the Italian SBs while the financial crisis and banks scandals are still ongoing. The measurement and evaluation of the achieved efficiency level is one of the key parameters to monitor in order to ensure continuity of business processes and, consequently, a vital tool for risk management activities. The measure of efficiency is the esteem of the Data Envelopment Analysis, a non-parametric method. The analysis covers 37 Italian SBs during the 2012–2014 period evaluating the efficiency of single DMUs. In the second part, we develop comparison and speculations on SBs efficiency when integrate or not into a bank group from which they borrow managerial experiences and corporate policies. The empirical DEA-based results can be take into account as an early warning for the banking risk evaluation and provide strategic information. To the best of our knowledge, this is the only recent study devoted to the efficiency measurement of the Italian SBs. Moreover, is the only one that use the pre-tax profits as variable able to encompass the traditional operational and non-traditional activities that may have, in years of elevate risks uncertainty, a great economic impact on financial statements. Our study is particularly important because Italian SBs drives the development of local economies fo-cusing on SMEs and families. From a risk perspective, our results can be of special interest to several stakeholders such as bank managers and people of local communities. Risk Management and Bank Financing 359
... There is on-going discussion in the banking literature regarding the proper definition of inputs and outputs (Fethi and Pasiouras, 2010). Till today, there is no all-encompassing theory of the banking firm and no agreement on the explicit definition and measurement of banks' inputs and outputs (Casu, 2002;Sathye, 2003). Two different approaches appear in the literature regarding the measurement of inputs and outputs of a bank, popularly known as production approach and intermediation approach (Humphrey, 1985). ...
... In 9 out of 15 years of study period, PSBs perform relatively better than private sector banks. The finding are quite consistent with some of the past studies such as Sathye (2003) for the period 1996-1997; Sinha (2008) for the period 2002-2003Mahesh and Rajeev (2009) for the period 1985 to 2004. The radial changes in accounting, deregulation of interest rates, close follow-up of non-performing assets, introduction of prudential norms, voluntary retirement of old generation staff, concern for customer care, professionalism as a part of reform process have made the management of PSBs to turn to generate surpluses and make these banks self-sufficient even by approaching capital market (Ram Mohan and Ray, 2004). ...
The purpose of the study is to examine the performance of Indian banking sector in terms of efficiency, returns to scale, and total factor productivity change. The technique of data envelopment analysis is applied due to its flexibility to incorporate multiple inputs and multiple outputs without any underlying assumption on the functional form. There is growing tendency of public sector banks operating under increasing returns to scale, implying that substantial gains could be obtained from altering scale via either internal growth or consolidation in the sector. In terms of productivity, the results show a positive change in both the sectors due to technological change, possibly as a result of adoption of latest technology and new business practices in post reform period. However, there is an evidence of shrink in the market and negative growth in productivity in both the sectors during the period of global financial crisis. The main contribution of the paper is to empirically provide the evidences to resolve the debate if the global financial crisis had any impact on the performance of banking sector in India.
... (1) Charnes, Cooper, and Rhodes (1978) formulated the linear programming to optimize the formula through a model known as CCR, which assumes constant returns to scale (CRS). An efficient DMU operating under the CRS assumption is technologically efficient but also "uses the most efficient scale of operation" (Casu & Girardone, 2002). However, this assumption is only appropriate when all ...
... The authors find reasonably similarity in magnitude in efficiency measures generated from stochastic and deterministic frontiers and also similar variation in efficiency levels. They also reveal that despite similarities in range and variance of the efficiency score, the DEA cost efficiency shows increasing trend between1996 and 1998 and demonstrates a rather sharp decrease in 1999 [6]. ...
... Choice of inputs and outputs variables for the estimation. The selection of the input and output variables for the DEA estimation remained inconclusive among the researchers (Casu and Girardone, 2002;Sathye, 2003). There are three approaches such as intermediate, value-added and production approaches which are broadly used for the selection of the inputs and outputs. ...
Purpose
The purpose of this study is to measure the level of total factor productivity of the Indian banking sector and to identify both the bank-specific and macroeconomic determinants of the total factor productivity after the global subprime mortgage crisis.
Design/methodology/approach
The research sample consists of 61 commercial banks including 21 public sector banks, 18 private sector banks and 22 foreign banks. The annual data is collected from the website of Reserve Bank of India from 2008 to 2019. The authors employed the non-parametric DEA approach to estimate Malmquist total factor productivity index for each bank as well as across different ownership groups. The panel data estimation technique was used to identify the determinants of total factor productivity.
Findings
The results suggested that an increase in the technological shift raised the bank's productivity above the optimal frontier. Among the bank-specific determinants, the bank size and bank diversifications are significantly declining productivity, whereas credit-deposit ratio and return on asset significantly increasing productivity. Among the macro-specific determinants, inflation, growth rate and fiscal deficit ratio negatively affect productivity, whereas capital formation to the GVA ratio boosts the level of productivity.
Research limitations/implications
The authors have used intermediate method to select the inputs and outputs as per the suitability to the context. However, the disaggregate level such as state and district level analysis can be done using production and value-added approaches to explore the regional variations of the banking performance. Furthermore, the parametric methods such as stochastic frontier analysis can be used to examine banking performance, which the authors left for the future research.
Practical implications
This study suggested that banks should increase the economies of scale of their total assets and focus on the interest-earning activity. The banks need to proactively operate the business policy by following the changing path of inflation. The banks need to reduce their rate of fiscal-deficit to the GVA with the purpose to boost their level of productivity.
Originality/value
The study provides an important implication for bankers and policymakers in terms of heightening the banking performance during the period of dynamic economic events.
... The performance of banking industry is studied extensively across the world and a very rich literature is available on every aspect of banking industry from different regions of the world (Kraft, and Tirtiroglu, 1998, Crystal, Dages, and Goldberg, 2001, Fethi, Jackson, and Weyman 2001, Juan, Randall, and Williams, 2001, Casu, and Girardone, 2002, Akhigbe and McNulty, 2003, Berger, and Mester, 2003, Kwan, 2003, Mukherjee, Nath and Pal, 2003, Green, Murinde, and Nikolov, 2004. Along with country specific studies, there is a handsome literature available on cross-country comparison of banking performance (Molyneux, Michael and John, 1994, Allen, and Rai, 1996, Caprio and Klingebie, 1999, Hutchison and McDill, 1999, Bikker and Johannes, 2000, Altunbas, et. ...
Pakistan has a majority of Muslims population, but the general public is not well aware of the culture of Islamic banking. Not only the non Muslims but among Muslims, separate groups have different attitudes, opinions, views and understanding toward Islamic banking activities e.g. risk management in Islamic banks, profitability, liquidity, and solvency. In this study, financial ratios are used to compare the performance of Islamic and Conventional banks. This study finds that
Pakistani Islamic banks are significantly less profitable and less efficient while Islamic bank are more solvent (less risky) as compared to the Conventional banks. But there is no significant difference in the liquidity position of Islamic and Conventional banks.
... While the empirical technique of the second step in a two-step approach is maximum likelihood estimation of a Tobit or OLS model, Hoff (2007) and Hwang and Kao (2008) have concluded that the OLS model should replace the Tobit model as a sufficient second step in a two-step approach. However, in applying the OLS model, very little is known about the prediction in real-time of economic efficiency measures; some prominent examples include Casu and Girardone (2002), Drake et al. (2006), Barth et al. (2013), Thagunna and Poudel (2013), Dong et al. (2014), Rosman et al. (2014), and Assaf et al. (2019). ...
This paper contributes to the sparse debate on the effect of capital adequacy requirements on banks’ economic efficiency measures. Precisely, we evaluate the out-of-sample predictability of capital adequacy requirements on banks’ economic efficiency measures using Support Vector Regression (SVR) model with Linear, Polynomial and Radial Basis Function kernels and ordinary least squares (OLS) model. This analysis is important because a prediction of economic efficiency measures allows for an untangle view of bank’s progress that is useful for management as it gains a high degree of transparency in the evaluation of future events. Our framework adapts optimization of h-block cross-validation to account for serial correlation of economic variables to produce robust sets of tuning parameters for SVR model. Using a total of 10,380 December quarterly observations of U.S. Commercial and Domestic banks spanning from 2008 through 2019, empirical results show that SVR model provides better benchmarking insights in the evaluation of economic efficiency measures compared to the OLS model. Furthermore, in contrast to previous approaches identifying a single “best” model among competing models, the results of Model Confidence Test suggests that the out-of-sample forecasting confidently identifies superior predictive accuracy of SVR model-based forecasts over OLS model.
... While the empirical technique of the second step in a two-step approach is maximum likelihood estimation of a Tobit or OLS model, Hoff (2007) and Hwang and Kao (2008) have concluded that the OLS model should replace the Tobit model as a sufficient second step in a two-step approach. However, in applying the OLS model, very little is known about the prediction in real-time of economic efficiency measures; some prominent examples include Casu and Girardone (2002), Drake et al. (2006), Barth et al. (2013), Thagunna and Poudel (2013), Dong et al. (2014), Rosman et al. (2014), and Assaf et al. (2019). ...
This paper contributes to the sparse debate on the effect of capital adequacy requirements on banks' economic efficiency measures. Precisely, we evaluate the out-of-sample predictability of capital adequacy requirements on banks' economic efficiency measures using Support Vector Regression (SVR) model with Linear, Polynomial and Radial Basis Function kernels and ordinary least squares (OLS) model. This analysis is important because a prediction of economic efficiency measures allows for an untangle view of bank's progress that is useful for management as it gains a high degree of transparency in the evaluation of future events. Our framework adapts optimization of h-block cross-validation to account for serial correlation of economic variables to produce robust sets of tuning parameters for SVR model. Using a total of 10,380 December quarterly observations of U.S Commercial and Domestic banks spanning from 2008 through 2019, empirical results show that SVR model provides better benchmarking in-sights in the evaluation of economic efficiency measures compared to the OLS model. Furthermore, in contrast to previous approaches identifying a single "best" model among competing models, the results of Model Confidence Test suggests that the out-of-sample forecasting confidently identifies superior predictive accuracy of SVR model-based forecasts over OLS model.
... This study employed the non-parametric Data envelopment analysis (DEA) to estimate efficiency scores. Most scholars that adopted this analysis are Berger and Humphrey (1997) [20][21] , Ferrier & Lovell (1990) [33] , Sheldon (1994) [60] , Resti (1997) [53] , Bauer et al. (1998) [15] Casu & Giradone (2002) [23] , Weill (2004) [64] , Fiorentino et al. (2006) [35] etc. The main non-parametric method, DEA, was introduced by Charnes et al. (1978) [24] and is an analytical tool used to measure relative efficiency of firms throughout the process of transforming inputs into outputs. ...
The objective of this research is to tests the relationship between market power and efficient-structure hypotheses in the Nigerian banking industry over the period of 2007 to 2015. The Data of this study was estimated using statistical analysis known as non-parametric, data envelopment analysis to obtain reliable efficiency measures and multiple regression method to estimate the final results. Our results show that efficient-structure hypothesis is positive and significantly related with profitability in the Nigerian banking industry allowing the rejection of the market power hypotheses. Due to the acceptance of the two hypotheses such as x-efficient hypothesis and scale efficient hypothesis, we conclude that Nigerian commercial banks may improve their profitability by increasing their asset size. This suggests that during the period under consideration, the Nigerian banks adopt a sufficient competitive behaviour and that they generate their profitability not through market power exercise but rather through efficient activity. These results should encourage the economic policy measures aimed at protecting the national markets to compete favourably with international partners.
... There are mainly two approaches to the selection of input and output variables. The production approach, also known as the service provision or value-added approach and the intermediation approach, also called the asset approach (Humphrey 1985;Casu and Girardone 2002). Both methods apply the traditional microeconomic theory of the firm to the banks and differ only in the specification of the banking activities (Kumar and Gulati 2008). ...
This paper aims to compare the efficiency, technological gap, and stability of Islamic and conventional banks in the GCC region. We estimate group-specific cost frontiers for each banking type, and a Meta cost frontier for all banks to draw insights on the technological heterogeneity between the GCC Islamic and conventional banks. In the second stage analysis, we use the Generalized Method of Moments (GMM) to highlight the major determinants of bank efficiency in GCC countries. We also investigate the differences, if any, in the stability of Islamic and conventional banks against the 2007–08 global financial crisis. A panel dataset of 72 banks over the period 2005–2011 that covers the crucial period of the global financial crisis is used for the analysis. The results show that there is no statistically significant difference in mean efficiency between Islamic and conventional banks when efficiency is measured relative to the group frontier. But, Meta Frontier Analysis that accounts for the differences in the modalities of the two banking systems reveals that Islamic banking technology is not at par with the industry’s standard. The decomposition of the efficiency scores indicates that the pure technical efficiency of Islamic banks is significantly higher than that of conventional banks, but Islamic banks are posed to higher dis-economies of scale. The analysis further reveals that the 2007–08 financial turmoil has moderately affected the GCC banking sector; we found no evidence of statistically significant differences in the resilience levels of Islamic and conventional banks against the financial crises.
... Different researchers select different measures. Casu and Girardone (2002) examined the cost efficiency of the Italian bank conglomerates by assessing the cost characteristics of bank parent companies and their subsidiaries. Favoring the intermediation approach, they considered as inputs labor cost, deposits and physical capital whiles total loans and other earning assets were used as outputs. ...
This paper extends the conventional DEA models to a robust DEA (RDEA) framework by proposing new models for evaluating the efficiency of a set of homogeneous decision-making units (DMUs) under ellipsoidal uncertainty sets. Four main contributions are made: (1) we propose new RDEA models based on two uncertainty sets: an ellipsoidal set that models unbounded and correlated uncertainties and an interval-based ellipsoidal uncertainty set that models bounded and correlated uncertainties, and study the relationship between the RDEA models of these two sets, (2) we provide a robust classification scheme where DMUs can be classified into fully robust efficient, partially robust efficient and robust inefficient, (3) the proposed models are extended to the additive DEA model and its efficacy is analyzed with two imprecise additive DEA models in the literature, and finally, (4) we apply the proposed models to study the performance of banks in the Italian banking industry. We show that few banks which were resilient in their performance can be robustly classified as partially efficient or fully efficient in an uncertain environment.
... This has led to increasing popularity of data envelopment analysis in performance evaluation of the banking sector in the past three decades. However, most of the studies taking this route have focused on technical efficiency and scale efficiency (Ho & Zhu, 2004;Aikaeli, 2008;Kamau, 2011;Moffat, 2008;Eken and Kale, 2011), while some of them have focused on cost efficiency (Casu, 2002;Berger and Humphrey, 1997). Another emerging strand of literature argues that standard measures of banking performance based on profitability ratios capture only one dimension of the performance which may be different from efficiency (Athanassopoulos & Thanassoulis, 1995;Kumar, 2008;Frimpong, 2010;Keramidou, Mimis & Fotinpoulou, 2013). ...
The objective of this paper is to evaluate and benchmark the performance of Tanzanian Saving and Credit Cooperatives (SACCOs). Measuring the performance of these organizations is useful in helping them to monitor and control their performance and business processes and improve productivity and profitability. The study used secondary data from audited financial statements from 103 SACCOs. Technical efficiency was estimated using the data envelopment analysis approach and profitability was measured using return on assets. Then an efficiency-profitability matrix was employed to distinguish best performers from struggling SACCOs. This particular approach has been selected to account for multiple dimensions of performance measures. Using the top 25% as a cut-off for profitability and efficiency we found that only 12% of the firms were diagnosed as best performers (stars). The majority of the firms (61%) were classified under the low efficiency low profitability category. Fourteen SACCOs were highly profitable but had low efficiency scores, which demonstrate a potential for performance improvement by increasing their efficiency. Another group of 14 SACCOs were classified as potential candidates for divestiture because they had high efficiency scores but low profitability. Conclusively the performance of the industry in Tanzania needs a well-thought turnaround strategy to make it commercially viable. For the majority of the SACCO both profit-increasing and efficiencyincreasing strategies are required.
... A latest work compared cost and pro¯t e±ciency of European¯nancial conglomerates with respect to universal banks (Vander Vennet 2002). In particular, there are two studies that tried to evaluate e±ciency and productivity change of Italian conglomerates (Casu & Girardone 2002, Casu & Girardone 2004. ...
The crucial role of mutual banks in promoting local development is highlighted by an extensive theoretical and empirical literature. The historical success of mutual banks derives not only from their specific business model, but also from their peculiar and distinguishing corporate governance with member ownership. According to a copious literature, these features have probably allowed mutual banks to better withstand financial crisis. This work compares the cost efficiency of European mutual banks by analyzing a sample which consists of the universe of all the banks operating in Italy, Germany, France and Spain over the period 2011–2016, by employing a stochastic approach (Stochastic Frontier Analysis-SFA) to determine the effects of the recent financial crisis on the efficiency level of this particular kind of bank. The analysis aims to point out the determinants of efficiency in order to understand if the mutual model reveals to be still attractive in the modern banking system. The main contribution of the paper to previous literature consists in comparing different impacts of financial crisis on efficiency of mutual banks in main European countries. Furthermore, the results enrich the recent debate about the cooperative and mutual banking system and its raison d’être. Our results show that the European mutual banks reveal a higher degree of efficiency with respect to commercial banks. Cost efficiency appears to be significantly and negatively related to the level of regulatory capital, the level of credit risk, the level of leverage and the cost-income ratio. On the other hand, it is significantly and positively related to the profitability of the traditional lending activity, to the level of prudence in terms of provisions against credit risk and to the amount of liquidity as a buffer against unexpected troubles.
... Casu and Girardone [15] analyses the cost efficiency, profit efficiency and productivity change of Italian financial conglomerates during the 1990s utilising Stochastic Frontier Approach (SFA), and Data Envelopment Analysis (DEA) methods. The authors find reasonably similarity in magnitude in efficiency measures generated from stochastic and deterministic frontiers and also similar variation in efficiency levels. ...
The paper seeks to measure and compare the performance of state-owned commercial banks, conventional private commercial banks and Islamic commercial banks operating in Bangladesh during 2009-2014 using the Data Envelopment Analysis (DEA). It uses a sample of 19 commercial banks comprising four state-owned banks, ten conventional private commercial banks and five Islamic commercial banks. The paper shows that the average technical efficiency scores of state-owned banks, conventional private banks and Islamic banks are 0.8592, 0.9419 and 0.9569 respectively. This means that state-owned banks experience highest inefficiency of 14.08% followed by conventional private commercial banks (5.81%) and Islamic banks (4.42%). It is also found that state-owned banks and Islamic banks face technical inefficiency due mainly to scale inefficiency while technical inefficiency of conventional private commercial banks is attributed mainly to pure technical inefficiency. The efficiency results suggest that state-owned commercial banks and Islamic banks need to improve their technical by enhancing scale efficiency. Conventional private banks may improve their technical efficiency by upgrading managerial performance. JEL Classifications Numbers: C14, C61, G21
... Casu and Girardone [15] analyses the cost efficiency, profit efficiency and productivity change of Italian financial conglomerates during the 1990s utilising Stochastic Frontier Approach (SFA), and Data Envelopment Analysis (DEA) methods. The authors find reasonably similarity in magnitude in efficiency measures generated from stochastic and deterministic frontiers and also similar variation in efficiency levels. ...
The paper seeks to measure and compare the performance of state-owned commercial banks, conventional private commercial banks and Islamic commercial banks operating in Bangladesh during 2009-2014 using the Data Envelopment Analysis (DEA). It uses a sample of 19 commercial banks comprising four state-owned banks, ten conventional private commercial banks and five Islamic commercial banks. The paper shows that the average technical efficiency scores of state-owned banks, conventional private banks and Islamic banks are 0.8592, 0.9419 and 0.9569 respectively. This means that state-owned banks experience highest inefficiency of 14.08% followed by conventional private commercial banks (5.81%) and Islamic banks (4.42%). It is also found that state-owned banks and Islamic banks face technical inefficiency due mainly to scale inefficiency while technical inefficiency of conventional private commercial banks is attributed mainly to pure technical inefficiency. The efficiency results suggest that state-owned commercial banks and Islamic banks need to improve their technical by enhancing scale efficiency. Conventional private banks may improve their technical efficiency by upgrading managerial performance.
... The authors find reasonably similarity in magnitude in efficiency measures generated from stochastic and deterministic frontiers and also similar variation in efficiency levels. They also reveal that despite similarities in range and variance of the efficiency score, the DEA cost efficiency shows increasing trend between1996 and 1998 and demonstrates a rather sharp decrease in 1999 [6]. ...
Abstract
The article investigates the technical efficiency of the state-owned, conventional commercial and Islamic commercial banks in Bangladesh over the period 2009–2014. The paper employs parametric stochastic frontier approach (SFA) to estimate technical efficiency of 19 commercial banks comprising 4 state-owned, 10 conventional commercial and 5 Islamic commercial banks. The findings of the paper shows that average technical efficiency scores of state-owned banks, conventional private banks and Islamic banks are 0.7410, 0.9157 and 0.9640 respectively. This implies that state-owned, conventional private commercial and Islamic commercial banks in Bangladesh have experienced inefficiency of 25.90 percent, 8.43 percent and 3.60 percent respectively. Results indicate that commercial banks in Bangladesh have wasted, on average, 12.64 percent resources which could be saved to produce the same level of output. The efficiency results suggest that there are enough rooms for advancement in technical efficiency across all types of commercial banks in Bangladesh by refining managerial performance.
... For efficiency measures, the sample of conventional banks in Egypt covers 64 percent of population and includes 28 commercial banks over the period 2006-2013. The selection of output and input variables adheres to the intermediation approach, which has been widely employed in conventional bank studies, given the intermediary role of banks (Al-Gasaymeh, 2016; Allen and Rai, 1996;Alshammari, 2003;Carbo et al., 2002;Casu and Girardone, 2002;Maudos et al., 2002;Mester, 1996;Yudistira, 2004). Total costs are defined as operating and 1298 IJOEM 13,5 financial costs, calculated as the sum of labor expenses, physical capital expenses and interest expense. ...
Purpose
The purpose of this paper is to examine the relevance of the bank lending channel (BLC) of monetary policy and the bank efficiency in Egypt.
Design/methodology/approach
This paper examines the effectiveness of bank lending channel using generalized method of moments GMM model during the period from 1996 to 2014. Also, it uses stochastic frontier approach (SFA) to examine the bank efficiency in Egypt.
Findings
This study supports the relevance of the BLC using panel data. Moreover, applying SFA, this paper computes cost efficiency taking account of both time and country effects directly. The finding suggests that banks with low inflation and high GDP tend to perform more efficiently.
Research limitations/implications
The limitation of the study is examining one country only.
Practical implications
The finding signals that the Central Bank of Egypt (CBE) should adjust interest rate in order to stabilize the bank loan supply.
Social implications
It is important for the CBE and Egyptian banks because it highlights the importance of BLC.
Originality/value
It examines one channel of monetary policy and bank efficiency in Egypt.
... Bauer et al. (1998) is the only cross-checking study that quantifies differences in large and heterogeneous samples consisting of dissimilar financial institutions. More recent studies, (e.g., Casu & Girardone, 2002) find higher consistency in the efficiency estimates derived with the application of DEA and DFA. Another typical finding in the literature is that SFA produces higher efficiency scores as compared to DEA (e.g., Beccalli, Casu, & Girardone, 2006) and that small samples of banks with similar characteristics tend to underestimate differences between DEA and SFA. ...
This paper assesses the impact of the financial crisis on the levels of banking efficiency within the Eurozone. We examine if the crisis had asymmetric effects on bank efficiency across different regions of the Eurozone, comparing the banks in the financially stressed European periphery to those in the surplus economies of the core during 2005–2012. We use Data Envelopment Analysis (DEA) to measure bank efficiency and the Brockett and Golany (1996) test to identify group-based differences in efficiency. Our results indicate a gradual convergence process in efficiency between the banks of the core and periphery countries up to 2008. This process is reversed with the escalation of the financial crisis from 2009 to 2012 and the pattern of bank performance becomes asymmetric. Moreover, our findings suggest a more benign impact of the crisis on the core banks, which anyway outperform peripheral banks throughout the period considered.
... Some authors studied the level of efficiency of banking groups' holdings [68,69], other works focused on the structure of the distribution network [70] and only one author compared cost and profit efficiency of financial intermediaries belonging to conglomerates with the same measures referred to universal banks [71]. Three other works analyzed efficiency and productivity of Italian financial conglomerates [72,73] or Luxembourgian conglomerates [74]. ...
In the last few years, financial managers, supervisors and policy makers have been collectively engaged on the role of the banking and financial sector in relation to environmental and sustainability issues. The efficiency level that characterizes the production process of banks and financial intermediaries is strictly interconnected with sustainability so that, from a long term perspective, cost and profit efficiency reveals to be one of the most important premises for sustainability. This work aimed to analyze the level of efficiency achieved by European banking groups to verify if some key drivers of efficiency deriving from strategic choices outlined by literature on single banks (i.e., size, number of branches, cost income ratio and geographical location) are the same when considering banking groups. The study is focused on the period 2011-2016 that is characterized by, at least, two critical events that occurred after the sub-prime crisis. The level of efficiency of each banking group was measured with the Stochastic Frontier Approach and then the units were clustered into three homogeneous sets. Observing these clusters, the results show that the groups belonging to some specific countries appear to be more efficient with respect to others. Moreover, the banking groups characterized by many branches and a high level of cost income ratio exhibit a medium level of efficiency. Eventually, the biggest banking groups are the least efficient.
... The performance of banking industry is studied extensively across the world and a very rich literature is available on every aspect of banking industry from different regions of the world (Kraft, and Tirtiroglu, 1998, Crystal, Dages, and Goldberg, 2001, Fethi, Jackson, and Weyman 2001, Juan, Randall, and Williams, 2001, Casu, and Girardone, 2002, Akhigbe and McNulty, 2003, Berger, and Mester, 2003, Kwan, 2003, Mukherjee, Nath and Pal, 2003, Green, Murinde, and Nikolov, 2004. Along with country specific studies, there is a handsome literature available on cross-country comparison of banking performance (Molyneux, Michael and John, 1994, Allen, and Rai, 1996, Caprio and Klingebie, 1999, Hutchison and McDill, 1999, Bikker and Johannes, 2000, Altunbas, et. ...
Pakistan has a majority of Muslims population, but the general public is not well aware of the culture of Islamic banking. Not only the non Muslims but among Muslims, separate groups have different attitudes, opinions, views and understanding toward Islamic banking activities e.g. risk management in Islamic banks, profitability, liquidity, and solvency. In this study, financial ratios are used to compare the performance of Islamic and Conventional banks. This study finds that Pakistani Islamic banks are significantly less profitable and less efficient while Islamic bank are more solvent (less risky) as compared to the Conventional banks. But there is no significant difference in the liquidity position of Islamic and Conventional banks.
... The conversion rates were drawn from the World Bank's World Development Indicators (WDI, 2010), and GDP deflators were provided by the IMF, 2010. The selection of output and input variables adheres to the intermediation approach which was widely employed in Islamic and conventional bank studies, given the intermediary role of banks (Al-Jarrah, 2010; Allen & Rai, 1996;Alshammari, 2003;Carbo, Gardener, & Williams, 2002;Casu & Girardone, 2002;Maudos, Pastor, Perez, & Quesada, 2002;Mester, 1996;Yudistira, 2004). Total costs are defined as operating and financial costs, calculated as the sum of labour expenses, physical capital expenses and income paid to depositors for Islamic banks or interest expense for conventional banks. ...
Using data from 2003 to 2010, we examine the impact of economic freedom and country risks on the bank costs of potential Gulf Cooperation Council (GCC) union. In estimating a common frontier, this article employs Stochastic Frontier Approach (SFA) to control for country-specific variables, that is, economic freedom, country risk, macroeconomic conditions, bank accessibility and bank structure, for an unbalanced panel of 90 Jordanian and the GCC countries’ banks. This article further estimates bank efficiency levels in the potential GCC union member countries to shed some light on the capability and capacity of the banks to compete and survive within the future GCC union. We find that economic freedom helps in reducing potential bank costs. Enhancing economic freedom is crucial for the region to attract more investments and create a viable banking system. In order for the GCC members to have a successful union and achieve the objectives faster, it is important to have a similar level of economic performance, in particular in the banking sector.
... Among the many researches that focus on the European banks (e.g., Berg et al., 1992;Berg, Forsund, Hjalmarsson, & Suominem, 1993;Casu & Girardone, 2002;Casu, Girardone, & Molyneux, 2004;Chaffai, Dietsch, & Lozano-Vivas, 2001;Grifell-Tatje & Lovell, 1996;Noulas, 2001). Berg et al. (1992) analysed the performance of 346 Norwegian banks from 1980 to 1989 using the Malmquist index and found that productivity regress before deregulation and progress after deregulation. ...
This study aims to undertake an evaluation and examination of the productivity change of the Egyptian banking sector, using a novel data set which covers 14 banks operating in the Egyptian market from 1997 to 2013. We use a non-parametric approach Data Envelopment Analysis (DEA) based analysis to investigate the productivity change in the Egyptian banking sector. Input-oriented Malmquist indices of productivity change are estimated with DEA to measure total factor productivity (TFP) change. The TFP changes are decomposed into the product of technological change and technical efficiency change (catch up). In the second stage, potential determinants of productivity change are studied using a regression model. We find that the Egyptian banking sector as a whole shows a productivity regress of 0.9 per cent per year, which is mainly due to the technological improvements. The estimated regression model identifies some variables which significantly influence the productivity of banks in Egypt. The banks with higher loans to deposit ratio and higher returns on equity have higher productivity growth reflecting on their strong strategic and managerial skills. The size of bank seems to be associated with an increase in productivity. The maturity of a bank (measured by age) is associated with higher productivity. The net interest margin (NIM) and non-interest expense over total assets (NIETA) variables do not seem to be affecting the productivity of banks. Surprisingly, our results reveal that the financial crisis is negatively and statistically insignificant which means there are no effects on the Egyptian banks.
... Studies that compare parametric and non-parametric techniques are Ferrier and Lovell (1990), Sheldon (1994), Resti (1997), Bauer, et. al. (1998), Casu and Girardone (2002), Weill (2004) and Beccalli, et. al. (2006). ...
... The study of Sherman and Gold (1985) is widely known as the first on banking industry via DEA technique and many others followed ( Italian researchers started investigation on banking efficiency in nineties. Important studies were developed by Favero-Papi (1995) and Resti (1997) highlighting scale inefficiencies and regional disparities while Casolaro and Gobbi (2007) (Vivas, 1997) in the investigation of economies and efficiency of conglomerates (Casu and Girardone, 2002). However, most of their studies focuses on commercial banks, while fewer examines also SBs efficiency. ...
Nowadays, Italian Savings Banks (SBs) are providing financial support for the development of local economies as full commercial competitors and players of the Italian banking sector. The study points out the strong link between efficiency performance and the evolution of the sector characterised by a transition from a territorial proximity to a regional brand and thus to a partial collapse. Via the non-parametric Data Envelopment Analysis – Slack Based Model methodology, the evaluation of the SBs efficiency score is carried out over the 2010-2015 period. The results show that SBs belonging to a Bank Group regularly outperform the Stand-Alone ones. Thus, generally increasing technical efficiency, managerial efficiency and scale efficiency confirm the sectorial evolution. The study is innovative for considering the question of SBS and territorial branding of banking groups. Moreover, its results help to understand how to avoid the same mistakes of the past in the future, therefore, under current circumstances, it is particularly important for scholars, managers, people of local communities, and decision-makers.
... One of the very first steps in carrying out DEA consists in the determination of inputs and outputs. It is generally acknowledged that in the banking sector literature, there is no comprehensive theory regarding the proper definition of inputs and outputs, what exactly constitutes inputs and outputs, or how these could be measured (Casu and Girardone 2002;Fethi and Pasiouras 2010;Sathye 2003). However, two main approaches have been advanced in this regard: the "intermediation approach" and the "production approach" (Humphrey 1985), with the recommendation that the former should be used when assessing the performance of whole banks, while the latter should be used when estimating the performance of bank branches. ...
Over the past few decades, the banking sectors in Latin America have undergone rapid structural changes to improve the efficiency and resilience of their financial systems. The up-to-date literature shows that all the research studies conducted to analyze the above-mentioned efficiency are based on a deterministic data envelopment analysis (DEA) model or econometric frontier approach. Nevertheless, the deterministic DEA model suffers from a possible lack of statistical power, especially in a small sample. As such, the current research paper develops the technique of satisficing DEA to examine the still less explored case of Peru. We propose a Satisficing DEA model applied to 14 banks operating in Peru to evaluate the bank-level efficiency under a stochastic environment, which is free from any theoretical distributional assumption. The proposed model does not only report the bank efficiency, but also proposes a new framework for peer mining based on the Bayesian analysis and potential improvements with the bias-corrected and accelerated confidence interval. Our study is the first of its kind in the literature to perform a peer analysis based on a probabilistic approach.
... In the banking literature, there is a great disagreement among researchers about what constitute inputs and outputs of the banking industry (Casu, 2002;Sathye 2003). Three different approaches appear in the literature regarding the measurement of inputs and outputs of a bank. ...
The purpose of this paper is to analyze the efficiency of Islamic banks operating in different countries, over the period 2006-2009.We applied a non-parametric approach, or a Data Envelopment Analysis (DEA), that utilizes both the constant returns to scale (CRS) and the variable returns to scale (VRS) assumptions to offer measures of the technical and scale efficiency. The outcomes reveal a considerable degree of dispersion of technical efficiency between banks within the sample of the year-to-year basis. To inspect the determinants of efficiency, we apply the panel regression analysis. In fact, we used panel regression analysis in order to explain the variation in the dependent variable (calculated efficiencies) by a set of independent variables, such as banks size, asset quality, management capability, liquidity, sensitivity to markets risks, and capitalization.We find that banks with higher liquidity and a good management capability are more likely to operate at higher levels of technical efficiency. In addition, the results show that size, seem to contribute negatively to the evolution of efficiency scores of Islamic banks operating in the world.
... In this context, public sector banks were allowed to convert into joint stock companies; bank mergers were encouraged; and the structural separations between short and long-term lending institutions were abolished in favour of a "universal banking" model. However, in Italy the organisational model that prevailed was the so-called polyfunctional group structure that was preferred to the classical universal bank model that was common for example in Germany (see Casu and Girardone, 2002 and Chapter 23 in this handbook). Typically, polyfunctional groups are controlled by a commercial bank (the parent company) and are allowed to offer a wide range of financial servicessuch as leasing and factoring -, that are offered by separate institutions within the same banking group. ...
This chapter begins with a brief historical perspective on the evolution of the Italian banking sector and then considers the most recent developments in the structure and performance features of the industry. It also covers key issues and concerns that have intensified in Italy particularly in the aftermath of the global financial crisis of 2007-08, including the deterioration in credit quality and the debated reforms affecting cooperative banks.
... The most difficult task, while working out efficiency of banks, is to choose the appropriate and related inputs and outputs. There is no unanimity as to what constitute input and output the bank (Casu & Girardone, 2002;Sathye, 2003). However, two frequently used approaches are indicated by the literature on banking efficiency i.e., production approach and intermediation approach. ...
The objective of this study was to examine technical (TE), pure technical (PTE) and scale (SE) efficiencies of 32 commercial banks (CB) in Pakistan for the year 2009. The study applied a non-parametric Data Envelopment Analysis (DEA) to measure efficiencies. For the selection of inputs and outputs variables, an intermediation approach was adopted. These variables were Number of employees, Physical Capital and Borrowed funds, as inputs while net advances, investments and lending to financial institutions as outputs. Two basic models of DEA namely CCR and BCC were applied. The empirical results of these models disclosed that CB functioned at 93 percent level of TE which means that CB can achieve the same level of outputs by using 7% less than current inputs used. The technical inefficiency was mainly caused by scale size (4%) than managerial inefficiency (3%). The predominate cause of scale inefficiency was observed to be decreasing return to scale. The most efficient (highly robust) banks were Bank of Punjab, Habib Metropolitan, Muslim Commercial bank, Burj Bank, and Faysal Bank while Bank Islami and HSBC Oman were indicated as most inefficient banks.
... Studies on the Italian banking sector efficiency are few such as the Favero-Papi [21] and Resti [33] about the determinants as scale inefficiencies and regional disparities and one on Italian cooperative banks as per [6]. Casu and Girardone [14] compared results obtained in different countries focusing on commercial banks. Since the work of Sherman and Gold [37], considered the first on banking industry, scholars refers to the DEA technique as a useful tool to measure the relative efficiency of banks as in [13] and [22]. ...
This study investigates the efficiency of the Italian SBs sector over the 2012–2013 period. The measure of efficiency is the esteem of the SBM Data Envelopment Analysis. In the first stage of the analysis, we evaluate the SBs efficiency while in the second stage we compare the performance of SBs belonging to bank groups with those stand-alone. In order to evaluate the impact of be part of a bank group on efficiency we use Policy Evaluation tools, performing an impact evaluation with the controlled by a group considered as the “treatment” variable and checking for a set of relevant banking ratios. To deal with self-selection bias (heterogeneity in treatment propensity related to variables), we use the PS Matching estimating the average treatment effects relying on the Ichino-Becker propensity scores. The novelty of this research resides in the combined application of DEA and Policy Evaluation tools for the specific field. Results show that when comparing SBs belonging to a banks group with stand-alone SBs, although a positive but not significant ATT, we find no relevant differences between the SBs part of a bank group and the stand-alone. However, with reference to Technical Efficiency the stand-alone SBs experience the worst performance while after an insight into the inefficiency decomposition it becomes clear that difficulties are due to managerial inefficiency. Finally, we present speculation, linked to real circumstances, with respect to the Italian SBs sector.
... What exactly constitutes inputs and outputs in the banking sector, as well as how to measure them, represents an area of constant debate in the literature on banking (Casu & Girardone, 2002;Sathye, 2003). Nevertheless, although there is no comprehensive theory, two main approaches regarding the measurement of inputs and outputs compete in this literature: the 'intermediation approach' and the 'production approach' (Humphrey, 1985). ...
... The data is expressed in international Dollars and adjusted for inflation using the country GDP deflator. The selection of output and input variables follows the existing literature which normalized around their mean values (Abdul-Majid et al., 2012;Allen and Rai, 1996;Casu and Girardone, 2002;Mester, 1996). Total costs are defined as operating and financial costs and calculated as the sum of labor expenses, physical capital expenses, and either income paid to depositors of Islamic banks or interest expenses of conventional banks. ...
... The conversion rates were drawn from the World Bank's World Development Indicators (WDI, 2010), and GDP deflators were provided by the IMF, 2010. The selection of output and input variables adheres to the intermediation approach which was widely employed in Islamic and conventional bank studies, given the intermediary role of banks (Al-Jarrah, 2010; Allen & Rai, 1996;Alshammari, 2003;Carbo, Gardener, & Williams, 2002;Casu & Girardone, 2002;Maudos, Pastor, Perez, & Quesada, 2002;Mester, 1996;Yudistira, 2004). Total costs are defined as operating and financial costs, calculated as the sum of labour expenses, physical capital expenses and income paid to depositors for Islamic banks or interest expense for conventional banks. ...
Using data from 2007 to 2014, we investigate the effects of inflation, unemployment rate and GDP per capita growth on bank efficiency for the Gulf Cooperation Council countries in an unbalanced panel consisting of 75 banks and 415 observations. Applying stochastic frontier estimation procedures, we compute cost efficiency taking account of both time and country effects directly. In second-stage regressions, we use the efficiency measures to investigate the influence of country risk variables and concentration ratio applying Generalized Method of Moments technique with respect to the impact of political risk, credit ratings and debt in default. The finding suggests that banks in countries with low country risk, and low concentration tend to perform more efficiently. Furthermore, a negative but insignificant relationship between total assets and bank efficiency reflects the fact that larger banks in developing countries suffer from diseconomies of scale.
This paper investigates the role of competition in the Middle East and North Africa countries for the period of 2012-2021. The bank efficiency is measured using Stochastic Frontier Analysis. Using a sample of 177 commercial banks and a dynamic panel data approach in GMM technique, the empirical results revealed that the higher the competition the higher bank efficiency. This finding suggests that banks in countries with low high competition tend to perform more efficiently. Furthermore, a negative but insignificant relationship between total assets and bank efficiency reflects the fact that larger banks in developing countries suffer from diseconomies of scale.
Employee composition problem at PT. PLN (Persero) Bangka Belitung Region is still on demand. When a unit needs more employees, the unit makes a request for additional employees. Even though, it is not important to unit needs, moreover the background at additional employees cannot tell to add a number of these employees. The 35,000 MW project increases the number of projects in generation and distribution and transmission. Workload problems are influenced by the number of employees composition in a section, employees' competency, etc. Workload samples taken from each rayon found that Pangkal Pinang Rayon has the highest workload ratio in PLN Babel, the difference with other rayon is 6915.43 with the number of customers to 145,224 with the total number of employees 21 people. The total composition of employees is measured by Full Time Equivalent and Data Envelopment Analysis method is combined with business data to get the appropriate number of employees so that the reporting of workload data does not burden the employees in their daily activities. Due to a greater workload or lot compared to other offices. Therefore, an increase in workforce is needed. ABSTRAK Masalah komposisi pegawai di PT PLN (Persero) Wilayah Bangka Belitung masih on demand. Ketika unit membutuhkan lebih banyak karyawan, unit membuat permintaan untuk karyawan tambahan. Padahal, tidak penting untuk kebutuhan unit, apalagi latar belakang di karyawan tambahan tidak bisa menyuruh untuk menambah sejumlah karyawan tersebut. Proyek 35.000 MW meningkatkan jumlah proyek dalam pembangkitan dan distribusi dan transmisi. Masalah beban kerja dipengaruhi oleh jumlah komposisi karyawan dalam suatu bagian, kompetensi karyawan, dll. Sampel beban kerja yang diambil dari setiap rayon menemukan bahwa Pangkal Pinang Rayon memiliki rasio beban kerja tertinggi di PLN Babel, selisihnya dengan rayon lainnya adalah 6915,43 dengan jumlah pelanggan menjadi 145.224 dengan jumlah karyawan 21 orang. Komposisi total karyawan diukur dengan metode Full Time Equivalent dan Data Envelopement Analysis dikombinasikan dengan data bisnis untuk mendapatkan jumlah karyawan yang sesuai sehingga pelaporan data beban kerja tidak membebani karyawan dalam kegiatan sehari-hari mereka. Karena beban kerja atau lot yang lebih besar dibandingkan dengan kantor lain. Oleh karena itu, diperlukan peningkatan tenaga kerja.
Purpose
This paper examines the technical efficiency (TE) of Indian commercial banks during 1998–2015.
Design/methodology/approach
This study uses mathematical programming-based data envelopment analysis (DEA) methodology to measure technical efficiency of Indian banks. Further, Simar and Wilson (2007) double bootstrap procedure is applied to examine the determinants of efficiency of the Indian banks, by examining the effects of various bank specific and other contextual variables.
Findings
The results indicate substantial upward bias in the conventional efficiency estimates of the Indian commercial banks. Needless to note, such upward bias is consistent with the theoretical postulates. The bootstrapped regression results show that increasing capital adequacy ratio is positively associated with bank efficiency. The popular belief that non-performing assets have a dampening effect on performance of banks is validated. Among others, ownership category is observed to be an important determining factor of bank efficiency. Specifically, state-owned banks (SOBs) are relatively lagging behind the foreign banks. Moreover, larger banks are observed to have a significantly higher level of efficiency, therefore, recent official policy initiatives toward consolidation of SOBs are validated.
Originality/value
As this study uses Simar and Wilson (2007) bootstrap approach, it enables the authors to have an estimate of the extent of bias in the traditional DEA TE scores. It also helps us drawing consistent inferences by rectifying the problem of serial correlation in the conventional second stage regression in this regard.
Failure to recognize undesirable outputs under states the cost efficiency of a decision making unit, in this case a commercial bank. Price inefficiency is found pervading the public, private and foreign sector banks as they fail to procure their inputs at constant prices. Non-Performing Assets (NPAs) is an undesirable output that harms the performance of a commercial bank. This study decomposes economic efficiency of 63 commercial banks into the product of Price, Risk and Farrell' s input cost efficiency. The foreign sector banks operate relatively in a risk free environment but at relatively high price inefficiency. The public sector banks operate at a relatively high risk environment.
Financial conglomerates and bank competition play a significant role in developing efficiency levels and increased risk exposure. This study aims to formulate a conceptual model of the policy’s impact of financial conglomerates and bank competition on bank efficiency and stability risk. This research is conducted using data samples from 90 commercial banks in Indonesia from 2010 to 2017. The empirical analysis is carried out using the dynamic data panel or Generalized Method of Moments (GMM). The study results show that policies of financial conglomerates and competition have a positive effect on banking efficiency. These results support previous empirical studies, where financial conglomeration, in general, can improve banking efficiency. Furthermore, it is found that the interaction between financial conglomerates and competition has a positive effect on banking stability. The implication of this research shows that the potential risks that cause distortion become irrelevant when the banking structure is more competitive. Furthermore, this study recommends the need to build the ideal financial conglomerate institutional structure to strengthen and encourage the role of more competitive banks.
This study explores the readiness of the Turkish banking sector for its accession to the European Union (EU). Obviously, the job is not finished yet, with the challenges of introducing country risk variables and their impact on banking efficiency, although efficiency analysis remains an important issue in economic studies to answer whether or not the Turkish banking sector is ready for the accession to the EU. Therefore, this study aims to investigate the impact of country risk levels on banking efficiency in Turkey and the EU in the recent year, using stochastic frontier analysis for a parametric technique for the period 2010–2018. In the second stage, efficiency measures are used to investigate the effect of country risk and macroeconomic variables, applying the generalized method of moments. The results suggest that the banking sector operating in a country with low
risk tends to perform more efficiently.
Performance evaluation of decision-making units (DMUs) via the data envelopment analysis (DEA) is confronted with multi-conflicting objectives, complex alternatives and significant uncertainties. Visualizing the risk of uncertainties in the data used in the evaluation process is crucial to understanding the need for cutting edge solution techniques to organizational decisions. A greater management concern is to have techniques and practical models that can evaluate their operations and make decisions that are not only optimal but also consistent with the changing environment. Motivated by the myriad need to mitigate the risk of uncertainties in performance evaluations, this thesis focuses on finding robust and flexible evaluation strategies to the ranking and classification of DMUs. It studies performance measurement with the DEA tool and addresses the uncertainties in data via the robust optimization technique.
The thesis develops new models in robust data envelopment analysis with applications to management science, which are pursued in four research thrust. In the first thrust, a robust counterpart optimization with nonnegative decision variables is proposed which is then used to formulate new budget of uncertainty-based robust DEA models. The proposed model is shown to save the computational cost for robust optimization solutions to operations research problems involving only positive decision variables. The second research thrust studies the duality relations of models within the worst-case and best-case approach in the input – output orientation framework. A key contribution is the design of a classification scheme that utilizes the conservativeness and the risk preference of the decision maker. In the third thrust, a new robust DEA model based on ellipsoidal uncertainty sets is proposed which is further extended to the additive model and compared with imprecise additive models. The final thrust study the modelling techniques including goal programming, robust optimization and data envelopment to a transportation problem where the concern is on the efficiency of the transport network, uncertainties in the demand and supply of goods and a compromising solution to multiple conflicting objectives of the decision maker.
Several numerical examples and real-world applications are made to explore and demonstrate the applicability of the developed models and their essence to management decisions. Applications such as the robust evaluation of banking efficiency in Europe and in particular Germany and Italy are made. Considering the proposed models and their applications, efficiency analysis explored in this research will correspond to the practical framework of industrial and organizational decision making and will further advance the course of robust management decisions.
The purpose of this article is to analyze the literature related to the problem ofbank effectiveness. The article is divided into three parts. The first one is devotedto the various concepts of effectiveness. The second part discusses the methodsand tools used to measure the level of efficiency of a banking market. The thirdpart presents results of selected studies on this issue, with a special emphasis onthe banking sectors of economies during systematic transformation.
The economic significance of the banking sector is well recognized in the theory and practice. In the literature there are discussed various topics concerning banking: banking sectors stability and its determinants, as well as influence of the banking sector on other sectors of the economy. Moreover the situation in the banking sector has been studied from different perspectives: its stability, profitability, efficiency, competition, concentration. A special part of literature is related to economies in transition. Therefore aim of the article is to conduct a comparative analysis of the financial standing of the banking sectors in selected countries of the Western Balkans, i.e. Bosnia and Herzegovina, Macedonia and Croatia, and current Baltic States (former republics of the USSR), i.e. Lithuania, Latvia and Estonia, few years after the financial crisis. Thanks to the use of the CAMELS method it is possible to check which banking sectors are in better shape: these which are only at the initial stage of transformation of the banking sectors or these where the transformation of this sector has been already completed. The data was collected from International Monetary Fund covering the period of five years 2010–2015, on quarterly basis.
This chapter investigates the relevance of the inclusion of non-traditional activities in the specification of banks’ output on the efficiency of Indian banks. The empirical results indicate that the exclusion of non-traditional activities not only understates the cost, technical and allocative efficiencies of individual banks, but also affects the ranking of ownership groups in the industry. In particular, when a proxy for non-traditional activities is accounted for in the output specification, the foreign banks appear to be more efficient than public and private sector banks. Overall, the results reinforce the prevailing view in the extant literature that the exclusion of non-traditional activities causes misspecification of banks’ output, and may distort the efficiency estimates.
The present paper examines the cost efficiency of Indian commercial banks by using a non-parametric Data Envelopment Analysis Technique. The cost efficiency measures of banks are examined under both separate and common frontiers. This paper also empirically examines the impact of mergers on the cost efficiency of banks that have been merged during post liberalization period. The present study based on unbalanced panel data over the period 1990-91 to 2007-08. In this paper to test the efficiency differences between public and private both parametric and non-parametric tests are employed. The findings of this study suggest that over the entire study period average cost efficiency of public sector banks found to be 73.4 and for private sector banks is 76.3 percent. The findings of this paper suggest that to some extent merger programme has been successful in Indian banking sector. The Government and Policy makers should not promote merger between strong and distressed banks as a way to promote the interest of the depositors of distressed banks, as it will have adverse effect upon the asset quality of the stronger banks.
Purpose
– The purpose of this paper is to explore the business strategy and its strategic orientation in the context of Indian banking sector. While past research has focussed on internal factors, organizational performance and organizational design, present research intends to fill the gap by assessing the strategic archetypes for Indian banking.
Design/methodology/approach
– A review of literature resulted in 14 items covering various aspects of strategy orientation. A structured questionnaire was used to obtain insights from bank managers. The study is based on responses received from 330 banking officials working in various functional areas of banks in India.
Findings
– Using factor analysis, the 14 items are reduced into four major factors: competition, cost, innovation and customer need. In terms of strategic preferences, the finding indicates that respondents have given higher rating for both market share (25 percent) and new products (25 percent), followed by cost (16 percent), competition (15 percent) and service (13 percent).
Originality/value
– With the dominant preference for market share and new products, authors proposed a market share-new product matrix and identified four quadrants: low return, resource constraint, complacency and optimal performance. The study offers guidance to managers to frame and assess the bank strategy.
Purpose
– The purpose of this paper is to examine the trends of cost efficiency (CE) of Indian banks in response to financial deregulation programme launched in early 1990s. More specifically, the findings of this paper offer empirical testing of the basic underlined hypothesis that the CE of banks will rise in the more liberal and competitive environment.
Design/methodology/approach
– The study employs input-oriented data envelopment analysis (DEA) models that incorporate the quasi-fixed inputs to compute the cost, technical, and allocative efficiency scores for individual banks. The unbalanced panel data spanning from the financial year 1992-1993 to 2007-2008 are used for obtaining efficiency measures. In addition, the panel data Tobit model has been applied to investigate the bank-specific factors explaining variations in the CE.
Findings
– The empirical findings pertaining to the trends of efficiency measures suggest that: first, deregulation programme has had a positive impact on the CE of Indian banks, and the observed increase in CE is entirely due to improvements in technical efficiency (TE); second, the ranking of ownership groups provides that public sector banks are more cost efficient along with the foreign than private banks; and third, there is a strong presence of global advantage hypothesis in the Indian banking industry. The results of post-DEA analysis reveal that size and exposure to off-balance sheet activities are the key determinants of CE. The results also support the existence of bad luck or bad management hypothesis in Indian banking industry.
Practical implications
– The practical implication of the research findings is that the financial deregulation programme seems to be successful in achieving the CE gains in the Indian banking industry. This explicitly signals that the cautious approach of banking reforms adopted by Indian policy makers has started bearing fruit in terms of the creation of an efficient banking system, which is immune to any sort of financial crisis, and resilient to both internal and external shocks.
Originality/value
– The present study offers new evidence on the time-series properties of cost, allocative, and TEs of Indian banks. The DEA models used in this study explicitly incorporate the equity as a quasi-fixed input, which accounts for “risk” in the bank efficiency measurement.
This chapter assesses the sensitivity of bank cost-efficiency scores obtained with stochastic frontier analysis and data envelopment analysis. We compare CE scores of either type for a large cross-country sample of EU banks from 1996 until 2010. The results show that CE measures differ considerably depending on specification choices across parametric and nonparametric methods. The chapter documents the reasons for these differences in terms of theoretical, sample, and further specification choices.
This introductory article reviews past research on the topic of financial institution efficiency, surveys the contributions in this special issue, and suggests how future research on this important topic might proceed.
The purpose of this paper is to derive the efficiency measures and the rate of technological change for a sample of large U.S. commercial banks by employing a nonparametric technique. This technique is used to construct a multiproduct production frontier relative to which the efficiency measures of the banks in the sample are calculated and the displacement of which over time provides a measure of the rate of technological change. The empirical results indicate that the relevant frontier shifted inward between 1980 and 1985 reflecting a high pace of technological advancement achieved by the banks in the sample. The pace varied significantly across the banks with some banks even regressing over time.
Frontier production functions are important for the prediction of technical efficiencies of individual firms in an industry. A stochastic frontier production function model for panel data is presented, for which the firm effects are an exponential function of time. The best predictor for the technical efficiency of an individual firm at a particular time period is presented for this time-varying model. An empirical example is presented using agricultural data for paddy farmers in a village in India.
This paper surveys 130 studies that apply frontier efficiency analysis to financial institutions in 21 countries. The primary goals are to summarize and critically review empirical estimates of financial institution efficiency and to attempt to arrive at a consensus view. We find that the various efficiency methods do not necessarily yield consistent results and suggest some ways that these methods might be improved to bring about findings that are more consistent, accurate, and useful. Secondary goals are to address the implications of efficiency results for financial institutions in the areas of government policy, research, and managerial performance. Areas needing additional research are also outlined.
A nonparametric frontier approach is used to calculate the overall, technical, pure technical, allocative, and scale efficiencies for a sample of 322 independent banks. The sample was drawn from the Federal Deposit Insurance Corporation tapes on the Reports of Conditions and Reports of Income (Call Reports) for the year 1986. The results indicate a low level of overall efficiency. The main source of inefficiency is technical in nature, rather than allocative. Separate efficiency frontiers are constructed to test the effect of branching. However, the distributions of efficiency measures for branching and nonbranching banks are not found to be different. Coauthors are Richard Grabowski, Carl Pasurka, and Nanda Rangan. Copyright 1990 by MIT Press.
Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.
Research on bank efficiency has developed in two separate streams: i) econometric studies, aimed at improving OLS estimates with an asymmetric structure for the residuals; ii) Data Envelopment Analysis, a linear programming model for multiple-input/multiple-output firms. These two branches of literature have developed quickly, but separately; now, the lack of correspondence between the rankings dictated by the two approaches suggests more comparative research. In this paper the two techniques have been tested on a common panel of 270 Italian banks, and this parallel application has suggested the following: i) econometric and linear programming results do not differ dramatically, when based on the same data and conceptual framework; ii) when differences arise, they can be explained by going back to the intrinsic features of the models. Moreover, some findings on Italian banks may be of interest also to the international reader: i) the efficiency scores show a high variance; ii) the banking system is split in two, between northern and southern banks; iii) there is a direct (rather than inverse) relationship between productive efficiency and asset quality; iv) the efficiency of Italian banks did not increase over the period 1988–1992.
In this paper a method of estimating the parameters of a set of regression equations is reported which involves application of Aitken's generalized least-squares [1] to the whole system of equations. Under conditions generally encountered in practice, it is found that the regression coefficient estimators so obtained are at least asymptotically more efficient than those obtained by an equation-by-equation application of least squares. This gain in efficiency can be quite large if “independent” variables in different equations are not highly correlated and if disturbance terms in different equations are highly correlated. Further, tests of the hypothesis that all regression equation coefficient vectors are equal, based on “micro” and “macro” data, are described. If this hypothesis is accepted, there will be no aggregation bias. Finally, the estimation procedure and the “micro-test” for aggregation bias are applied in the analysis of annual investment data, 1935–1954, for two firms.
In this paper a method of estimating the parameters of a set of regression equations is reported which involves application of Aitken's generalized least-squares [1] to the whole system of equations. Under conditions generally encountered in practice, it is found that the regression coefficient estimators so obtained are at least asymptotically more efficient than those obtained by an equation-by-equation application of least squares. This gain in efficiency can be quite large if “independent” variables in different equations are not highly correlated and if disturbance terms in different equations are highly correlated. Further, tests of the hypothesis that all regression equation coefficient vectors are equal, based on “micro” and “macro” data, are described. If this hypothesis is accepted, there will be no aggregation bias. Finally, the estimation procedure and the “micro-test” for aggregation bias are applied in the analysis of annual investment data, 1935–1954, for two firms.
The purpose of this paper is to briefly trace the evolution of DEA from the initial publication by Charnes et al. (1978b) to the current state of the art (SOA). The state of development of DEA is characterized at four points in time to provide a perspective in both directions—past and future. An evolution map is provided which illustrates DEA growth during the 17-year period, the timing of the major events, and the interconnections and influences between topics. An extensive DEA bibliography is provided.
A nonlinear (nonconvex) programming model provides a new definition of efficiency for use in evaluating activities of not-for-profit entities participating in public programs. A scalar measure of the efficiency of each participating unit is thereby provided, along with methods for objectively determining weights by reference to the observational data for the multiple outputs and multiple inputs that characterize such programs. Equivalences are established to ordinary linear programming models for effecting computations. The duals to these linear programming models provide a new way for estimating extremal relations from observational data. Connections between engineering and economic approaches to efficiency are delineated along with new interpretations and ways of using them in evaluating and controlling managerial behavior in public programs.
This paper discusses the mathematical programming approach to frontier estimation known as Data Envelopment Analysis (DEA). We examine the effect of model orientation on the efficient frontier and the effect of convexity requirements on returns to scale. Transformations between models are provided. Methodological extensions and alternate models that have been proposed are reviewed and the advantages and limitations of a DEA approach are presented.
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.
Economies of scale and scope for consolidated multibank holding companies (MBHCs) are examined with a translog cost function and are compared with one-bank holding companies (OBHCs) and independent banks. Empirical results indicate that costs curves are generally U-shaped for independent banks and OBHCs but are relatively flat for MBHCs. This evidence implies that banking organizations should prefer the MBHC to one-bank forms at higher output levels. Implications for bank regulatory policy and interstate banking are discussed.
Research on bank efficiency has developed in two separate streams: econometric studies and Data Envelopment Analysis, a linear programming technique. These two branches of literature have developed quickly, but separately; in this paper these two approaches have been tested on a common panel of 270 Italian banks, and this has suggested the following: (i) econometric and linear programming results do not differ dramatically, when based on the same data and conceptual framework; (ii) when differences arise, they can be explained by going back to the intrinsic features of the models. Moreover, some findings on Italian banks may be of interest also to the international reader: (i) efficiency scores show a high variance; (ii) the banking system is split in two, between northern and southern banks; (iii) there is a direct (rather than inverse) relationship between productive efficiency and asset quality; (iv) the efficiency of Italian banks did not increase over the period 1988–1992.
This paper investigates the cost structure of savings and loans. Most studies of financial institutions failed to take into account their multiproduct nature. Using the multiproduct approach, the existence of subadditivity, multi-product global and product- specific economies of scale and scope, and substitutability between inputs is investigated. A translogarithmic cost function is estimated using 1982 data on California savings and loans. Restrictive func- tional forms also estimated are rejected. Standard errors for the statistics calculated are estimated and various statistical tests are conducted. Previous authors have not calculated standard errors for these statistics. No evidence of subadditivity in the industry is found. Copyright 1987 by American Finance Association.
Inefficiency in the Italian Credit Cooperative Banking Sector. A Stochastic Frontier Analysis
- Y Altunbas
- P Molyneux
- Di Salvo
Altunbas, Y., Molyneux, P. and Di Salvo, R. (1994) " Inefficiency in the Italian Credit Cooperative Banking Sector. A Stochastic Frontier Analysis ". Institute of European Fi-nance Discussion Paper.
Struttura e dimensione dei gruppi ban-cari " . Servizio Documentazione Banca d'Italia (1990) Annual Report, Roma. Banca d'Italia (1996) Annual Report Frontier Production Functions, Technical Effi-ciency and Panel Data: With Application to Paddy Farmer in India
- Associazione Nazionale
- Private Battese
- G E Coelli
Associazione Nazionale Banche Private (1997) " Struttura e dimensione dei gruppi ban-cari ". Servizio Documentazione, updated 10/06/1997. Banca d'Italia (1990) Annual Report, Roma. Banca d'Italia (1996) Annual Report, Roma. Battese, G.E. and Coelli, T.J. (1992) " Frontier Production Functions, Technical Effi-ciency and Panel Data: With Application to Paddy Farmer in India ". Journal of Produc-tivity Analysis, 3, pp. 153-169.
Efficiency of Financial Institutions: Interna-tional Survey and Directions for Future Research " . Federal Reserve Board, Finance and Economics Discussion Series The Efficiency of Financial Institu-tions
- A N Berger
- D B Humphrey
Berger, A.N. and Humphrey, D.B. (1997) " Efficiency of Financial Institutions: Interna-tional Survey and Directions for Future Research ". Federal Reserve Board, Finance and Economics Discussion Series, 11. Berger, A.N., Hunter, W.C. and Timme, S.G. (1993) " The Efficiency of Financial Institu-tions ". Journal of Banking and Finance, 17, pp. 221-249.
La misurazione dell'efficienza economica: un'applicazione al sistema bancario italiano
- A M Cardani
- M Castagna
- M Galeotti
Cardani, A.M., Castagna, M. and Galeotti, M. (1991) " La misurazione dell'efficienza economica: un'applicazione al sistema bancario italiano ". Ricerche Economiche XLV, Vol. 1, pp.57-77.
L'economie di scala e di scopo nel settore bancario: alcune verifiche empiriche relative al caso italiano Funzioni di costo e obiettivi di efficienza nella produzione bancaria
- G Forestieri
- Conglomerates
- Paris Oecd
- G Goisis
Forestieri, G. (1995) Financial Conglomerates. OECD, Paris. Goisis, G. (1994) " L'economie di scala e di scopo nel settore bancario: alcune verifiche empiriche relative al caso italiano ". Economia e diritto del terziario, 3. Lanciotti, G. and Raganelli, T. (1988) " Funzioni di costo e obiettivi di efficienza nella produzione bancaria ". Banca d'Italia, Temi di discussione, 99, Roma.
Dimensioni, costi e profitti delle banche italiane
- A Landi
Landi, A. (1990) Dimensioni, costi e profitti delle banche italiane, Bologna, Il Mulino.
Economie di scala e diversificazione nell'industria bancaria: ruolo dell'eterogeneità tra imprese Banca d'Italia, Temi di Dis-cussione
- G Parigi
- P Sestito
- U Viviani
Parigi, G., Sestito, P. and Viviani, U. (1992) " Economie di scala e diversificazione nell'industria bancaria: ruolo dell'eterogeneità tra imprese. " Banca d'Italia, Temi di Dis-cussione, No. 174 (July).