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The cost efficiency of German banks : a comparison of SFA and DEA

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Author Info
Koetter, Michael
Karmann, Alexander
Fiorentino, Elisabetta

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Abstract

We 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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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2006,10.

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Date of creation: 2006
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Handle: RePEc:zbw:bubdp2:5157

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Related research
Keywords: Cost Efficiency; Banks; Stochastic Frontier Approach; Data Envelopment Analysis;

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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; Mortgages
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. von Kalckreuth, Ulf, 2005. "A "wreckers theory" of financial distress," Discussion Paper Series 1: Economic Studies 2005,40, Deutsche Bundesbank, Research Centre. [Downloadable!]
  2. Slacalek, Jirka & Fritsche, Ulrich & Dovern, Jonas & Döpke, Jörg, 2005. "European inflation expectations dynamics," Discussion Paper Series 1: Economic Studies 2005,37, Deutsche Bundesbank, Research Centre. [Downloadable!]
  3. Campbell, John Y. & Hilscher, Jens & Szilagyi, Jan, 2005. "In search of distress risk," Discussion Paper Series 1: Economic Studies 2005,27, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  4. Falko Fecht & Kevin Huang, 2004. "Financial intermediaries, markets, and growth," Econometric Society 2004 North American Summer Meetings 419, Econometric Society. [Downloadable!]
    Other versions:
  5. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Working Papers 97-1, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  6. Koetter, Michael & Bos, Jaap W. B. & Heid, Frank & Kool, Clemens J. M. & Kolari, James W. & Porath, Daniel, 2005. "Accounting for distress in bank mergers," Discussion Paper Series 2: Banking and Financial Studies 2005,09, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Naanwaab, Cephas & Hartarska, Valentina, 2008. "Efficiency In Community Develpoment Loan Funds," 2008 Annual Meeting, February 2-6, 2008, Dallas, Texas 6726, Southern Agricultural Economics Association. [Downloadable!]
  2. Nikolay Nenovsky & Martin Ivanov & Gergana Mihaylova, 2008. "The Evolution of Bulgarian Banks' Efficiency During the Twenties: A Dea Approach," Working Papers 82, Bank of Greece. [Downloadable!]
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