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Efficiency and Productivity Growth: Modelling in the Financial Services Industry

ISBN: 978-1-119-96752-1
286 pages
May 2013
Efficiency and Productivity Growth: Modelling in the Financial Services Industry (111996752X) cover image

An authoritative introduction to efficiency and productivity analysis with applications in both the banking and finance industry

In light of the recent global financial crisis, several studies have examined the efficiency of financial institutions. A number of open questions remain and this book reviews recent issues and state-of-the-art techniques in the assessment of the efficiency and productivity of financial institutions. Written by an international team of experts, the first part of the book links efficiency with a variety of topics like Latin American banking, market discipline and governance, economics of scale, off-balance-sheet activities, productivity of foreign banks, mergers and acquisitions, and mutual fund ratings. The second part of the book compares existing techniques and state-of-the-art techniques in the bank efficiency literature, including among others, network data envelopment analysis and quantile regression.

The book is suitable for academics and professionals as well as postgraduate research students working in banking and finance.

Efficiency and Productivity Growth:

  • Provides an authoritative introduction to efficiency and productivity analysis with applications in both the banking and mutual funds industry such as efficiency of Asian banks, cooperatives and not-for-profit credit associations.
  • Explores contemporary research issues in the area of efficiency and productivity measurement in the financial sector.
  • Evaluates the most suitable approaches to selecting inputs and outputs as well as selecting the most efficient techniques, such as parametric and non-parametric, to estimate the models.
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Preface xiii

Contributors xvii

1 Bank efficiency in Latin America 1
Philip Molyneux and Jonathan Williams

1.1 Introduction 1

1.2 Privatization and foreign banks in Latin America 2

1.3 Methodology 4

1.4 Model specification and data 7

1.5 Estimated parameters and cost efficiency 10

1.6 Conclusion 15

References 15

2 A primer on market discipline and governance of financial institutions for those in a state of shocked disbelief 19
Joseph P. Hughes and Loretta J. Mester

2.1 Introduction 20

2.2 Assessing the performance of financial institutions 21

2.3 Market discipline, public regulation, and the federal safety net 24

2.4 Sources of market discipline 27

2.4.1 Ownership structure 27

2.4.2 Capital markets 37

2.4.3 Product markets 37

2.4.4 Labor markets 39

2.4.5 Boards of directors 40

2.4.6 Compensation 41

2.5 Conclusions 42

Appendix 2.A: Measuring performance based on the highest potential market value of assets 43

References 44

3 Modeling economies of scale in banking: Simple versus complex models 49
Robert DeYoung

3.1 Introduction 49

3.2 The increasing size of banks 50

3.3 What has allowed banks to grow larger? 53

3.3.1 New banking technologies 53

3.4 Why do banks choose to be large? 54

3.4.1 Objectives of bank management 55

3.4.2 Government subsidies 56

3.4.3 Scale economies 56

3.5 Econometric modeling of bank scale economies 57

3.5.1 Findings from 50 years of studies 58

3.6 Weaknesses in econometric modeling of bank scale economies 60

3.6.1 Few and far between 61

3.6.2 Strategic groups 62

3.6.3 External costs 68

3.7 Other evidence on bank scale economies 68

3.7.1 Survivor analysis 68

3.7.2 The market price of banks 70

3.7.3 Bank size and bank risk-return trade-offs 71

3.8 Conclusions 73

References 74

4 Optimal size in banking: The role of off-balance sheet operations 77
Jaap W.B. Bos and James W. Kolari

4.1 Literature review 78

4.2 Off-balance sheet activities of European banks 79

4.3 Methodology 83

4.3.1 Stochastic frontier analysis 83

4.3.2 Functional form 84

4.3.3 Scale economies 85

4.4 Data 86

4.5 Results 86

4.5.1 Increasing OBS operations 86

4.5.2 Nonseparability effects of OBS operations 89

4.6 Conclusion 91

References 91

5 Productivity of foreign banks: Evidence from a financial center 95
Claudia Curi and Ana Lozano-Vivas

5.1 Introduction 95

5.2 Literature overview 98

5.3 Methodology 100

5.3.1 TFP growth measures 100

5.3.2 Estimation of the TFP growth measures 102

5.4 Data and sources 103

5.5 Empirical results 109

5.5.1 Productivity growth over time 109

5.5.2 Breaking down productivity growth 111

5.6 Conclusions 116

Acknowledgments 118

References 118

6 The impact of merger and acquisition on efficiency and market power 123
Franco Fiordelisi and Francesco Saverio Stentella Lopes

6.1 Introduction 123

6.2 Literature review 125

6.3 Empirical design 125

6.3.1 Data 125

6.3.2 Variables 127

6.3.3 The econometric approach 129

6.4 Results 129

6.5 Conclusions 131

References 132

7 Backtesting superfund portfolio strategies based on frontier-based mutual fund ratings 135
Olivier Brandouy, Kristiaan Kerstens, and Ignace Van de Woestyne

7.1 Introduction 135

7.2 Frontier-based mutual funds rating models 137

7.2.1 A taxonomy 137

7.2.2 MF frontier rating models retained 142

7.3 Backtesting setup, data description, and frontier-based portfolio models 144

7.3.1 Backtesting setup 144

7.3.2 Frontier-based portfolio models 146

7.3.3 Data description 146

7.4 Empirical analysis 148

7.4.1 Descriptive statistics 148

7.4.2 Analysis of both hedonic rating models 148

7.4.3 Backtesting results for 48 different strategies 153

7.4.4 Backtesting results for MF rating models: Some plausible explanations 159

7.5 Conclusions 166

Acknowledgments 168

References 168

8 Bank efficiency measurement and network DEA: A discussion of key issues and illustration of recent developments in the field 171
Necmi K. Avkiran

8.1 Introduction 171

8.2 Global financial crisis and the importance of DEA in bank performance analysis 172

8.3 The wider contribution of DEA to bank efficiency analysis and potential improvements 173

8.4 Principal advantages and disadvantages of DEA 174

8.5 DEA versus stochastic frontier analysis 176

8.6 Drilling deeper with network DEA in search of inefficiencies 177

8.6.1 Definition of ‘Network’ in banking applications of NDEA 177

8.6.2 Conceptualizing bank branch production 179

8.6.3 Network slacks-based measure of efficiency 181

8.6.4 A brief numerical example 183

8.6.5 Jackknifing versus bootstrapping 185

8.7 Moving forward with DEA 186

8.8 Conclusions 187

Appendix 8.A: Jackknifing 188

References 189

9 A dynamic network DEA model with an application to Japanese Shinkin banks 193
Hirofumi Fukuyama and William L. Weber

9.1 Introduction 193

9.2 Literature review of productivity analysis in credit banks in Japan 194

9.3 Dynamic network production 196

9.3.1 The two-stage technology 196

9.3.2 Three-year dynamic DEA 199

9.4 Cooperative Shinkin banks: An empirical illustration 202

9.4.1 Defining bank inputs and outputs 202

9.4.2 NPLs in the efficiency/productivity measurement 203

9.4.3 Data 204

9.5 Estimates 205

9.6 Summary and conclusions 209

References 211

10 Effects of specification choices on efficiency in DEA and SFA 215
Michael Koetter and Aljar Meesters

10.1 Introduction 215

10.2 Bank benchmarking background 216

10.2.1 Theoretical foundations 216

10.2.2 Benchmarking techniques 217

10.2.3 Specification options 218

10.3 Methodologies 220

10.3.1 Stochastic frontier analysis 220

10.3.2 Data envelopment analysis 221

10.4 Data 221

10.5 Results 225

10.5.1 Efficiency distributions 225

10.5.2 Rank correlations 230

10.5.3 Extreme performers 231

10.5.4 Accounting-based indicators 232

10.6 Conclusion 233

References 234

11 Efficiency and performance evaluation of European cooperative banks 237
Michael Doumpos and Constantin Zopounidis

11.1 Introduction 237

11.2 Methodology 239

11.2.1 Data envelopment analysis models 239

11.2.2 Multicriteria evaluation 240

11.3 Empirical results 241

11.3.1 Data and variables 241

11.3.2 Efficiency analysis results 244

11.3.3 Multicriteria evaluation results 247

11.4 Conclusions 251

References 251

12 A quantile regression approach to bank efficiency measurement 253
Anastasia Koutsomanoli-Filippaki, Emmanuel Mamatzakis, and Fotios Pasiouras

12.1 Introduction 253

12.2 Methodology and data 254

12.2.1 Methodology 254

12.2.2 Data and specification of the frontier 256

12.3 Empirical results 257

12.3.1 Cost efficiency estimates 257

12.3.2 Determinants of cost efficiency 259

12.4 Conclusions 262

Appendix 12.A: Information on variables 262

References 265

Index 267

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