The efficiency of financial institutions: A review and preview of research past, present and future (original) (raw)

Efficiency and Managerial Control in Financial Institutions

Studies measuring the efficiency levels of financial institutions including the banks and insurance companies have dramatically boosted in the efficiency and productivity analysis literature especially during the last two decades. The undesirable output sets that are under the control of managerial bodies in the financial institutions stimulate researchers to explain the potential relationship between the managerial control and inefficient usage of resources in this particular industry. Besides, the risks occurred throughout the decision-making process within the financial institutions started to be integrated into the efficiency analysis of financial sector. The primary goal of this chapter is to summarize and critically review the theoretical and empirical literature on the efficiency and managerial control in the financial institutions as well as to put forward a set of arguments about this specific discussion. Secondarily, recent efficiency literature leans towards to the inefficiency of foreign-owned financial institutions (i.e. banks) in regards to performance. Estimated efficiency frontiers of foreign-based banks compared to domestic banks are found to be lower; therefore, international consolidation efforts are argued to be slow in this industry. On the other hand, the international diversification has still been on the agenda of the mainstream portfolio prescriptions. Considering these arguments, this chapter also seeks to highlight the recent empirical works aiming to continue this intellectual conversation.

A CONCEPTUAL FRAMEWORK FOR AND SURVEY OF BANKING EFFICIENCY STUDY1

2006

This paper provides a conceptual framework for the banking efficiency study and a survey of the previous banking efficiency literature. The discussions include the concept of efficiency measurement, different types of efficiency, methodology as well as the approaches of input and output variables. The possible bank efficiency determinants or factors that could explain the differences in efficiency of the bank are also discussed. The findings show that no estimation techniques dominate over the other with DEA widely used to measure the technical efficiency while SFA mostly used to measure the cost efficiency. The paper also found that the intermediation approach is the common approach used to decide the appropriate input and output variables.

Bank efficiency: Evidence from a panel of European banks

2011

The goal of this paper is to investigate the efficiency of the banking systems in eight European countries over the period 1994 to 2008 by using the production frontier methodology. The paper shows that risk factors along with a size variable should be taken into account, otherwise inefficiency tends to be overstated.

THE COST OF FUNDS AND BANK EFFICIENCY THROUGH TIME

2000

A super-efficiency model within Data Envelopment Analysis (DEA) was used to study the relative efficiency of New Zealand banks for the period 1996 to 2003. Evidence was found for improvement in efficiency, although it was found that this was significantly a consequence of the reduction in the general level of interest rates over the period, which reduced banks' apparent utilisation

Evaluating the productive efficiency and performance of US commercial banks

Managerial Finance, 2002

Reviews previous research on the efficiency and performance of financial institutions and uses Siems and Barr’s (1998) data envelopment analysis (DEA) model to evaluate the relative productive efficiency of US commercial banks 1984‐1998. Explains the methodology, discusses the input and output measures used and relates bank performance measures to efficiency. Describes the CAMELS rating system used by bank examiners and regulators; and finds that banks with high efficiency scores also have strong CAMELS ratings. Summarizes the other relationship identified and recommends the use of DEA to help analysts and policy makers understand organizations in greater depth, regulators and examiners to develop monitoring tools and banks to benchmark their processes.

Measuring bank efficiency: tradition or sophistication? - A note

2009

The recent literature on measuring bank performance indicates a preference for sophisticated techniques over simple accounting ratios. We explore the results and relationships between bank efficiency estimates using accounting ratios and non-parametric DEA with bootstrap among Jamaican banks between 1998 and 2007. The results indicate different outcomes for the traditional accounting ratios and the sophisticated DEA methodology in the measurement of bank efficiency. GLS random effects two-variable regression tests for superiority using a risk index for insolvency suggest an advantage in favour of the DEA.