The cost efficiency of German banks: a comparison of SFA and DEA
AbstractWe investigate the consistency of efficiency scores derived with two competing frontier methods in the financial economics literature: Stochastic Frontier and Data Envelopment Analysis. We sample 34,192 observations for all German universal banks and analyze whether efficiency measures yield consistent results according to five criteria between 1993 and 2004: levels, rankings, identification of extreme performers, stability over time and correlation to standard accounting-based measures of performance. We find that non-parametric methods are particularly sensitive to measurement error and outliers. Furthermore, our results show that accounting for systematic differences among commercial, cooperative and savings banks is important to avoid misinterpretation about the status of efficiency of the total banking sector. Finally, despite ongoing fundamental changes in Europe?s largest banking system, efficiency rank stability is very high in the short run. However, we also find that annually estimated efficiency scores are markedly less stable over a period of twelve years, in particular for parametric methods. Thus, the implicit assumption of serial independence of bank production in most methods has an important influence on obtained efficiency rankings. --
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Bibliographic InfoPaper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2006,10.
Date of creation: 2006
Date of revision:
Cost Efficiency; Banks; Stochastic Frontier Approach; Data Envelopment Analysis;
Find related papers by JEL classification:
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-28 (All new papers)
- NEP-BAN-2007-01-28 (Banking)
- NEP-EFF-2007-01-28 (Efficiency & Productivity)
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