Analysing the determinants of bank efficiency: the case of Italian banks

Abstract

This study investigates the main determinants of Italian banks' cost efficiency over the period 1993-1996, by employing a Fourier-flexible stochastic cost frontier in order to measure X-efficiencies and economies of scale. Quality and riskiness of bank outputs are explicitly accounted for in the cost function and their impact on cost efficiency levels is evaluated. The results show that mean X-inefficiencies range between 13 and 15 per cent of total costs and they tend to decrease over time for all bank sizes. Economies of scale appear present and significant, being especially high for popular and credit co-operative banks. Moreover, the inclusion of risk and output quality variables in the cost function seems to reduce the significance of the scale economy estimates. Following Spong et al. (1995) a profitability test is undertaken that allows for the identification of banks that are both cost and profit efficient. The results suggest that the most efficient and profitable institutions are more able to control all aspects of costs, especially labour costs. Finally, the data are pooled to carry out a logistic regression model in order to examine bank- and market-specific factors that influence Italian banks' inefficiency. Confirming Mester (1993, 1996), inefficiencies appear to be inversely correlated with capital strength and positively related to the level of non-performing loans in the balance sheet. The analysis also shows that there is no clear relationship between asset size and bank efficiency. Finally, it is possible to infer that quoted banks seem to be on average more efficient than their non-quoted counterparts.

The Relationship between Capital Structure and Performance in Gulf Countries Banks: A Comparative Study between Islamic Banks and Conventional Banks

“…These findings seem to suggest that the more efficient banks use less leverage (more equity) compared to their peers. This result is aligned with the findings of Isik and Hassan, 2003;Staikouras and Wood, 2003;and Sufian and Habibullah, 2009. Result analysis either demonstrates a positive relationship between performance and bank size in conventional and Islamic banks which is similar to the results of researches in banking sector conducted by Berger, Hunter and Timme (1993), Miller and Noulas (1996), Girardone, Molyneux and Gardener (2004) …”

Profit and cost efficiency in the Italian banking industry (2006-2011)

“…Despite the huge literature on bank efficiency -there are exhaustive surveys by Berger and Humphrey (1997) and Fethi and Pasourias, (2010) -few papers have focused on Italy (Battaglia et al, 2010;Dongili et al, 2008;Fontani and Vitali, 2007;Giannola et al, 1997;Giannola and Scarfiglieri, 1998;Girardone et al, 2004). In this regards the evidence is mixed, but three conclusions may be drawn.…”

“…It must be also said that profit efficiency requires not only technical efficiency and both input and output allocative efficiency (as does the cost efficiency), but also an appropriate scale. Thus, banks cannot be profit efficient if they are scale inefficient (Berger and Mester, 1997) 3 Giannola et al (1997), Giannola and Scarfiglieri (1998), Girardone et al (2004), Giordano and Lopes (2006), Giordano and Lopes (2012), Fontani and Vitali (2007), Dongili et al (2008), Battaglia et al (2010). 4 As shown by Lensink and Meesters (2012) and Wang and Schmidt (2002), the two-step approach suffers from the fact that the inefficiency is assumed to be identically and independently distributed in the main frontier equation, while it depends on other variables in the inefficiency equation.…”

Does Ownership Structure Matter for Bank Performance in the MENA Region? An Empirical Evidence

“…Many scholars argue that asset quality measured by the ratio of nonperforming loans to total loans have significant negative impact on bank efficiency. High NPL ratio reveals inadequate credit policy and poor evaluation and monitoring process (Karim et al, 2010;Hughes and Mester, 1993;Altunbas et al, 2000;Girardone et al, 2004).…”