Production Efficiency in the South African Banking Sector: A Stochastic Analysis
Econometric estimates of the level of efficiency at bank branches are likely to provide detailed insight into the overall level of efficiency in banking. Therefore this paper uses Bayesian stochastic frontier analysis to assess the production efficiency of 61 bank branches in the nine provinces of the Republic of South Africa. We find that every branch is operating at increasing returns to scale and that the level of production efficiency of bank branches is lower than it could be. We also find that at current levels of output, on average, bank branches can reduce their costs by about 17% if they improve the level of efficiency. In addition, we find that Gauteng Province has the lowest average level of returns to scale, while the Free State Province has the highest average level of the nine provinces. In addition, via estimates of the posterior mean for shares and price elasticities, we find that the price of capital is the largest predicted proportion of costs. These findings suggest that bank branches could also obtain cost reductions by increasing the level of output. Regulatory policy reforms and competitive incentives to enable banks to meet this objective should be encouraged.
Volume (Year): 20 (2006)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/CIRA20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/CIRA20|
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.:
- Gary Koop & Mark F J Steel, 1999. "Bayesian Analysis of Stochastic Frontier Models," ESE Discussion Papers 19, Edinburgh School of Economics, University of Edinburgh.
- Fernandez, Carmen & Osiewalski, Jacek & Steel, Mark F. J., 1997. "On the use of panel data in stochastic frontier models with improper priors," Journal of Econometrics, Elsevier, vol. 79(1), pages 169-193, July.
- Ferrier, Gary D. & Grosskopf, Shawna & Hayes, Kathy J. & Yaisawarng, Suthathip, 1993. "Economies of diversification in the banking industry : A frontier approach," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 229-249, April.
- Ferrier, Gary D. & Lovell, C. A. Knox, 1990. "Measuring cost efficiency in banking : Econometric and linear programming evidence," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 229-245.
- Masciandaro, Donato, 2002. "What do your customers really know? Bank managers and compliance cost perceptions," Journal of Financial Transformation, Capco Institute, vol. 5, pages 37-42.
- Salvanes, K.G. & Tjotta, S., 1998. "A NOte on the Importance of Testing for Regularities for Estimated Flexible Functional Forms," Norway; Department of Economics, University of Bergen 177, Department of Economics, University of Bergen.
- Fried, Harold O. & Lovell, C. A. Knox & Schmidt, Shelton S. (ed.), 1993. "The Measurement of Productive Efficiency: Techniques and Applications," OUP Catalogue, Oxford University Press, number 9780195072181.
- van den Broeck, Julien & Koop, Gary & Osiewalski, Jacek & Steel, Mark F. J., 1994. "Stochastic frontier models : A Bayesian perspective," Journal of Econometrics, Elsevier, vol. 61(2), pages 273-303, April.
- Mitchell A. Petersen & Raghuram G. Rajan, 1994.
"The Effect of Credit Market Competition on Lending Relationships,"
NBER Working Papers
4921, National Bureau of Economic Research, Inc.
- Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May.
- KOOPÂ , Gary & OSIEWALSKIÂ , Jacek & STEELÂ , Mark, 1995.
"Bayesian Efficiency Analysis through Individual Effects : Hospital Cost Frontiers,"
CORE Discussion Papers
1995036, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Koop, Gary & Osiewalski, Jacek & Steel, Mark F. J., 1997. "Bayesian efficiency analysis through individual effects: Hospital cost frontiers," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 77-105.
- Koop, G. & Osiewalski, J. & Steel, M. F. J., . "Bayesian efficiency analysis through individual effects: Hospital cost frontiers," CORE Discussion Papers RP 1245, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, June.
- Kane, Edward J, 1996. "De Jure Interstate Banking: Why Only Now?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 141-61, May.
- Greene, William H., 1990. "A Gamma-distributed stochastic frontier model," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 141-163.
- Doris Neu Berger, 1998. "Industrial Organization of Banking: A Review," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 5(1), pages 97-118.
- Kishore Gawande, 1998. "Comparing Theories Of Endogenous Protection: Bayesian Comparison Of Tobit Models Using Gibbs Sampling Output," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 128-140, February.
When requesting a correction, please mention this item's handle: RePEc:taf:irapec:v:20:y:2006:i:1:p:103-123. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.