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Measuring Bank Profit Efficiency

  • Fitzpatrick, Trevor

    (Central Bank and Financial Services Authority of Ireland)

  • McQuinn, Kieran

    (Central Bank and Financial Services Authority of Ireland)

This paper proposes that a variant of the Battese and Coelli (1995) inefficiency model can be applied as a consistent and unifying framework in exploring the determinants of credit institutions’ profit inefficiency scores. To date, work concerned with the potential determinants of credit institutions' profit inefficiency levels has addressed the issue in either a single-step or multi-step process. In the former, inefficiency scores are conditioned by region and bank-specific indicators, while in the latter, generated inefficiency scores are subsequently regressed on a set of potential correlates. The approach proposed here allows these issues to be explored jointly in a statistically consistent manner. The model is applied to a sample of banks from Ireland, the UK, Canada and Australia.

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File URL: http://www.centralbank.ie/publications/documents/3RT05.pdf
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Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 3/RT/05.

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Length: 16 pages
Date of creation: May 2005
Date of revision:
Handle: RePEc:cbi:wpaper:3/rt/05
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  1. Schmalensee, Richard, 1985. "Do Markets Differ Much?," American Economic Review, American Economic Association, vol. 75(3), pages 341-51, June.
  2. 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.
  3. Maudos, Joaquin & Pastor, Jose M. & Perez, Francisco & Quesada, Javier, 2002. "Cost and profit efficiency in European banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(1), pages 33-58, February.
  4. Rahman, Sanzidur, 2003. "Profit efficiency among Bangladeshi rice farmers," Food Policy, Elsevier, vol. 28(5-6), pages 487-503.
  5. Amel, Dean & Barnes, Colleen & Panetta, Fabio & Salleo, Carmelo, 2004. "Consolidation and efficiency in the financial sector: A review of the international evidence," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2493-2519, October.
  6. Clark, Jeffrey A & Siems, Thomas F, 2002. "X-Efficiency in Banking: Looking beyond the Balance Sheet," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(4), pages 987-1013, November.
  7. Fitzpatrick, Trevor & McQuinn, Kieran, 2004. "Cost Efficiency in UK and Irish Credit Institutions," Research Technical Papers 3/RT/04, Central Bank of Ireland.
  8. Altunbas, Y. & Gardener, E. P. M. & Molyneux, P. & Moore, B., 2001. "Efficiency in European banking," European Economic Review, Elsevier, vol. 45(10), pages 1931-1955, December.
  9. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-32.
  10. Sturm, Jan-Egbert & Williams, Barry, 2004. "Foreign bank entry, deregulation and bank efficiency: Lessons from the Australian experience," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1775-1799, July.
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