Efficiency in banking: a meta-regression analysis

Abstract

One learns two main lessons from studying the great quantity of banking efficiency literature. These lessons regard the heterogeneity in results and the absence of a comprehensive review aimed at understanding the reasons for this variability. Surprisingly, although this issue is well-known, it has not been systematically analyzed before. In order to fill this gap, we perform a MetaRegression-Analysis (MRA) by examining 1661 efficiency scores retrieved from 120 papers published over the period 2000-2014. The meta-regression is estimated by using the Random Effects Multilevel Model (REML) because it controls for within-and between-study heterogeneity. The analysis yields four main results. First, parametric methods yield lower levels of banking efficiency than nonparametric studies. This holds true even after controlling for the approach used in selecting the inputs and outputs of the frontier. Secondly, we show that banking efficiency is highest when using the value-added approach, followed by estimates from studies based on the intermediation method, whereas those based on the hybrid approach are the lowest. Thirdly, efficiency scores are also determined by the quality of studies and the number of observations and variables used in the primary papers. As far as the effects of sample size, dimension and quality of papers are concerned, there are significant differences in sign and magnitude between parametric and nonparametric studies. Finally, cost efficiency is found to be higher than profit efficiency. Interestingly, MRA results are robust to the potential outliers in efficiency and sample size distributions.

Determinants of Cost Efficiency: Evidence from Banking Sectors in EU Countries

“…In a highly concentrated market, banks had higher market power which allowed them to set prices above marginal costs and achieve higher efficiency. Higher concentration reduced competition by fostering collusive behaviour among banks, whether more concentrated market improves cost efficiency as a whole, which is also in line with the finding of [1] and [2]. The condition of the economy described by the index of the Gross domestic product had a significant and positive impact on new cost efficiency.…”

“…In conclusion, the authors stated that it is essential to use such variables that reflect business specificities of all financial market participants in terms of variables' selection. The determinants of bank efficiency by DEA models during 2006-2011 was examined by [1]. The conclusion was that cost efficiency was positively affected by market concentration and demand density, while inversely related to branching.…”

Determinants of Food Security and Technical Efficiency among Agricultural Households in Nigeria

“…Our approach obtained the inefficiencies scores of agricultural outputs through a parametric Stochastic Frontiers Analysis (SFA). Our choice of parametric SFA over the non-parametric approach hinges on its ability to account for random shocks in production activities (Aiello and Bonanno 2015). This is largely because production activities among smallholder farmers are subjected to various stochastic errors emanating from factors use.…”

Banking Sector Performance, Profitability, and Efficiency: A Citation‐based Systematic Literature Review

“…In the banking sector efficiency literature survey, most of the earlier studies have adopted TLS method (Colwell and Davis, ; Toby, ; Iršová and Havránek, ; Paradi and Zhu, ; Sharma et al ., ; Kumar and Gulati, ; Jia, ). The studies that have used SLR method considered very limited number of papers and keywords (Aiello and Bonanno, ; Aiello and Bonanno, ; de Abreu et al ., ). For instance, Berger et al .…”