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An analysis of inefficiencies in banking: a stochastic cost frontier approach

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  • Simon H. Kwan
  • Robert A. Eisenbeis

Abstract

This paper examines the properties of X-inefficiency and the relations of X-inefficiency with risk-taking and stock returns for U.S. banking firms. After controlling for scale differences, the average small size banking firm is found to be relatively less efficient than the average large firm. Small firms also exhibit higher variations in X-inefficiencies than their larger counterparts. While the average X-inefficiency appears to be declining over time, the rank orderings of X-inefficiency are found to be quite persistent. Furthermore, less efficient banking firms are found to be associated with higher risk-taking, and firm-specific X-inefficiencies are significantly correlated with individual stock returns for smaller banking firms.

Suggested Citation

  • Simon H. Kwan & Robert A. Eisenbeis, 1996. "An analysis of inefficiencies in banking: a stochastic cost frontier approach," Economic Review, Federal Reserve Bank of San Francisco, pages 16-26.
  • Handle: RePEc:fip:fedfer:y:1996:p:16-26:n:2
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    References listed on IDEAS

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    Cited by:

    1. Kwan, Simon H., 2006. "The X-efficiency of commercial banks in Hong Kong," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1127-1147, April.
    2. Kulasekaran, Sivakumar & Shaffer, Sherrill, 2002. "Cost efficiency among credit card banks," Journal of Economics and Business, Elsevier, vol. 54(6), pages 595-614.
    3. Berger, Allen N. & DeYoung, Robert, 1997. "Problem loans and cost efficiency in commercial banks," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 849-870, June.
    4. Sambracos, Evangelos & Maniati, Marina, 2015. "Technical Efficiency of Shipping Banks: A DEA Approach," MPRA Paper 63131, University Library of Munich, Germany.
    5. Sergio Zuñiga & Eduardo Dagnino, 2003. "Medicion De La Eficiencia Bancaria En Chile A Traves De Fronteras Estocasticas (1990-1999)," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 6(2), pages 83-116.
    6. Jacob A. Bikker, 2001. "Efficiency in the European banking industry: an exploratory analysis to rank contries," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 17.
    7. DeYoung, Robert E. & Hughes, Joseph P. & Moon, Choon-Geol, 2001. "Efficient risk-taking and regulatory covenant enforcement in a deregulated banking industry," Journal of Economics and Business, Elsevier, vol. 53(2-3), pages 255-282.
    8. Berger, Allen N. & Mester, Loretta J., 1997. "Inside the black box: What explains differences in the efficiencies of financial institutions?," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 895-947, July.
    9. Berger, Allen N. & Bonaccorsi di Patti, Emilia, 2006. "Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1065-1102, April.
    10. Fu, Xiaoqing (Maggie) & Heffernan, Shelagh, 2007. "Cost X-efficiency in China's banking sector," China Economic Review, Elsevier, vol. 18(1), pages 35-53.
    11. Sufian, Fadzlan, 2006. "The Efficiency Of Islamic Banking Industry: A Non-Parametric Analysis With Non-Discretionary Input Variable," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 14, pages 54-87.
    12. Byrne, David & Kelly, Robert, 2017. "Bank Asset Quality & Monetary Policy Pass-Through," Research Technical Papers 11/RT/17, Central Bank of Ireland.
    13. Gabriel Asaftei & Subal Kumbhakar, 2008. "Regulation and efficiency in transition: the case of Romanian banks," Journal of Regulatory Economics, Springer, vol. 33(3), pages 253-282, June.
    14. G. Ardizzi & F. Crudu & C. Petraglia, 2015. "The Impact of Electronic Payments on Bank Cost Efficiency: Nonparametric Evidence," Working Paper CRENoS 201517, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    15. Javier E. Pirateque & José H. Piñeros & Linda Mondragón, 2013. "Eficiencia de los establecimientos bancarios (EB): una aproximación mediante modelos DEA," Borradores de Economia 798, Banco de la Republica de Colombia.
    16. Sumit Sarkar & Ram S. Sriram, 2001. "Bayesian Models for Early Warning of Bank Failures," Management Science, INFORMS, vol. 47(11), pages 1457-1475, November.
    17. Kraft, Evan & Tirtiroglu, Dogan, 1998. "Bank Efficiency in Croatia: A Stochastic-Frontier Analysis," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 282-300, June.
    18. Isik, Ihsan & Hassan, M. Kabir, 2003. "Financial disruption and bank productivity: The 1994 experience of Turkish banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 291-320.
    19. Isik, Ihsan & Hassan, M. Kabir, 2002. "Technical, scale and allocative efficiencies of Turkish banking industry," Journal of Banking & Finance, Elsevier, vol. 26(4), pages 719-766, April.
    20. DeYoung, Robert & Spong, Kenneth & Sullivan, Richard J., 2001. "Who's minding the store? Motivating and monitoring hired managers at small, closely held commercial banks," Journal of Banking & Finance, Elsevier, vol. 25(7), pages 1209-1243, July.
    21. Rima Turk Ariss, 2008. "Financial liberalization and bank efficiency: evidence from post-war Lebanon," Applied Financial Economics, Taylor & Francis Journals, vol. 18(11), pages 931-946.

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    Keywords

    Banks and banking - Costs ; Risk;

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