Evaluating cost and profit efficiency: a comparison of parametric and nonparametric methodologies

Abstract

This paper's objective is twofold. First it provides an empirical assessment of the cost and profit stochastic frontiers based on a panel dataset of Greek commercial banks over the 1993-2005 period. Second, on the basis of the same sample, it also compares the most widely used parametric and non-parametric techniques to cost efficiency measurement, namely the Stochastic Frontier Approach and Data Envelopment Analysis. The results suggest greater similarities between the predictions of cost and profit efficiency methods than between parametric and non-parametric techniques. Such evidence is new in the literature and calls for a more technically level playing field for estimating bank efficiency.

Comparison of Bank Efficiencies between the US and Canada: Evidence Based on SFA and DEA

“…Cost efficiency can be divided into standard profit function and alternative profit function, see Maudos et al (2002). In some respects, profit efficiency is a more precise approximation of technical efficiency compared to cost efficiency, see Delis et al (2009). We expect profit efficiency to be lower than cost efficiency due to the former's demonstration of broader flexibility and volatility of profit.…”

“…We expect profit efficiency to be lower than cost efficiency due to the former's demonstration of broader flexibility and volatility of profit. Until now, a very limited amount of studies have been conducted comparing these two factors, see Berger & Mester (1997) and Maudos et al (2002), with the most recent study Delis et al (2009), which concludes that the difference between two measurements is not as great as the difference between SFA and DEA.…”

“…More importantly, we care more about consistency regarding the rankorder of the two methods, which has emerged beginning in the late 1990s as a controversial issue, i.e. Resti (1997), Nguyen (2016) agree regarding consistency, while Ferrier and Lovell (1990), Delis et al (2009), Dong et al (2013) reveal relatively large discrepancies.…”

Cost and Profit Efficiency of Online Banks: Do National Commercial Banks Perform better than Private Banks?

“…How far they have achieved their desired goals? Bank cost and profit efficiency studies are available in literature [1][2][3][4][5][6][7][8][9][10][11][12][13][14][15][16][17][18][19]. There has been a prevalent discussion about lack of sufficient technical efficiency of banks in developing countries like in Bangladesh compared to their counterparts in the developed world [20][21][22][23].…”

How a regulatory capital requirement affects banks’ productivity: an application to emerging economies

“…There is a vast amount of literature on bank efficiency and productivity that examines a number of aspects such as investigating the determinants of efficiency (Canhato and Dermine, 2003;Casu and Molyneux, 2003); ownership (Havrylchyk, 2006;Sturm and Williams, 2004); stock returns and efficiency (Beccalli et al, 2006;Erdem and Erdem, 2008); corporate events and efficiency (Avkiran, 1999;Sherman and Rupert, 2006); regulatory reform, liberalization and efficiency (Brissimis et al, 2008;Fethi et al, 2011;Isik and Hassan, 2003;Tsionas et al, 2003); consolidation and its impact on banksÕ efficiency (Cuesta and Orea, 2002;Vivas et al 2011); and comparison of different frontier techniques (Delis et al, 2009) 3 . However, to our knowledge, there is an insufficient number of studies that formally consider the relationship between banksÕ regulated capital and productivity (Fethi et al, 2012).…”