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Measuring profit efficiency of Colombian banks: a composite non-standard profit function approach

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  • Diego Restrepo-Tobón
  • Jim Sánchez-González

Abstract

We analyse the evolution of profit efficiency of Colombian banks from 2001 to 2013, the most important period of consolidation for this industry. Unlike previous studies, we estimate revenue, cost, and profit efficiency within a unified framework. We find that profit efficiency significantly increased from 80% in 2002 to 91% in 2013. Median profit, revenue, and cost efficiency estimates are around 90.3, 85.2, and 99.5%, respectively. Median return on equity (ROE) was 8%. Without inefficiency, it could have been as high as 14.6%. Cost inefficiencies explain 92% of median unearned ROE while revenue inefficiency explains only 8%. Revenue and cost efficiencies are negatively correlated. However, both correlate positively with profit efficiency. Foreign banks and banks taking on more credit risk are more profit efficient while bigger banks and banks taking on more liquidity and market risk are less profit efficient.

Suggested Citation

  • Diego Restrepo-Tobón & Jim Sánchez-González, 2021. "Measuring profit efficiency of Colombian banks: a composite non-standard profit function approach," International Journal of Productivity and Quality Management, Inderscience Enterprises Ltd, vol. 33(2), pages 234-252.
    • Handle: RePEc:ids:ijpqma:v:33:y:2021:i:2:p:234-252
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    More about this item

    Keywords

    profit efficiency; revenue efficiency; cost efficiency; non-standard profit function; NSPF; stochastic frontier.;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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