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


  • Koetter, Michael
  • Karmann, Alexander
  • Fiorentino, Elisabetta


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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  • Koetter, Michael & Karmann, Alexander & Fiorentino, Elisabetta, 2006. "The cost efficiency of German banks: a comparison of SFA and DEA," Discussion Paper Series 2: Banking and Financial Studies 2006,10, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp2:5157

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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Clements Adeyinka Akinsoyinu, 2015. "Efficiency Evaluation of European Financial Cooperative Sector. A Data Envelopment Analysis Approach," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 5(4), pages 11-21, October.
    3. Havranek, Tomas & Irsova, Zuzana & Lesanovska, Jitka, 2016. "Bank efficiency and interest rate pass-through: Evidence from Czech loan products," Economic Modelling, Elsevier, vol. 54(C), pages 153-169.
    4. Головань С.В. & Назин В.В. & Пересецкий А.А., 2010. "Непараметрические Оценки Эффективности Российских Банков," Журнал Экономика и математические методы (ЭММ), Центральный Экономико-Математический Институт (ЦЭМИ), vol. 46(3), июль.
    5. repec:ceh:journl:y:2017:v:2:p:168-191 is not listed on IDEAS
    6. Andries, Alin Marius & Cocris, Vasile, 2010. "A Comparative Analysis of the Efficiency of Romanian Banks," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 54-75, December.
    7. Jimborean, Ramona & Brack, Estelle, 2010. "The cost-efficiency of French banks," MPRA Paper 23471, University Library of Munich, Germany.
    8. Benjamin M. Tabak & Daniel O. Cajueiro & Marina V. B. Dias, 2014. "The Adequacy of Deterministic and Parametric Frontiers to Analyze the Efficiency of Indian Commercial Banks," Working Papers Series 350, Central Bank of Brazil, Research Department.
    9. Francesco Grigoli & Javier Kapsoli, 2013. "Waste Not, Want Not; The Efficiency of Health Expenditure in Emerging and Developing Economies," IMF Working Papers 13/187, International Monetary Fund.
    10. Benjamin Miranda Tabak & Daniel Oliveira Cajueiro & Marina V. B. Dias, 2014. "The Efficiency of Chinese Local Banks: A comparison of DEA and SFA," Working Papers Series 346, Central Bank of Brazil, Research Department.
    11. Spandau, Johannes, 2010. "Fusionen im genossenschaftlichen FinanzVerbund: Eine erfolgreiche Strategie?," Arbeitspapiere 92, University of Münster, Institute for Cooperatives.
    12. Javier E. Pirateque & José H. Piñeros & Linda Mondragón, 2013. "Eficiencia de los establecimientos bancarios (EB): una aproximación mediante modelos DEA," BORRADORES DE ECONOMIA 011103, BANCO DE LA REPÚBLICA.
    13. Behr, Andreas, 2010. "Quantile regression for robust bank efficiency score estimation," European Journal of Operational Research, Elsevier, vol. 200(2), pages 568-581, January.
    14. Muneesh Kumar & Padmasai Arora, 2010. "Bank efficiency measurement using alternative techniques of frontier analysis: evidence from India," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 2(1), pages 40-69.
    15. Ramona Busch & Christoph Memmel, 2016. "Quantifying the components of the banks’ net interest margin," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 30(4), pages 371-396, November.
    16. Miguel SARMIENTOÕ & Andrés CEPEDA & Hernando MUTIS & Juan F. PÉREZ, 2013. "Nueva Evidencia sobre la Eficiencia de la Banca," ARCHIVOS DE ECONOMÍA 010705, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
    17. Rasoul Rezvanian & Rima Turk Ariss & Seyed Mehdian, 2011. "Cost efficiency, technological progress and productivity growth of Chinese banking pre- and post-WTO accession," Applied Financial Economics, Taylor & Francis Journals, vol. 21(7), pages 437-454.
    18. Elisabetta Fiorentino & Heinz Herrmann, 2009. "Effizienz und Wettbewerb im deutschen Bankensektor," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 78(1), pages 114-126.
    19. Lin, Kun-Li & Doan, Anh Tuan & Doong, Shuh-Chyi, 2016. "Changes in ownership structure and bank efficiency in Asian developing countries: The role of financial freedom," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 19-34.
    20. Naanwaab, Cephas B. & Hartarska, Valentina M., 2008. "Efficiency In Community Develpoment Loan Funds," 2008 Annual Meeting, February 2-6, 2008, Dallas, Texas 6726, Southern Agricultural Economics Association.
    21. Ma. Cecilia L. Catubig & Renato A. Villano & Brian Dollery, 2016. "The administrative efficiency of conditional cash transfer programmes: evidence from the Pantawid Pamilyang Pilipino Program," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 23(1), pages 133-158, June.
    22. Miguel Boucinha & Nuno Ribeiro & Thomas Weyman-Jones, 2013. "An assessment of Portuguese banks’ efficiency and productivity towards euro area participation," Journal of Productivity Analysis, Springer, vol. 39(2), pages 177-190, April.
    23. Silva, Thiago Christiano & Tabak, Benjamin Miranda & Cajueiro, Daniel Oliveira & Dias, Marina Villas Boas, 2017. "A comparison of DEA and SFA using micro- and macro-level perspectives: Efficiency of Chinese local banks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 469(C), pages 216-223.
    24. World Bank, 2016. "Mexico Public Expenditure Review," World Bank Other Operational Studies 25062, The World Bank.
    25. Katerina Voycheska, 2011. "Empirical Research on the Banking Efficiency in R. Macedonia," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 73-93.

    More about this item


    Cost Efficiency; Banks; Stochastic Frontier Approach; Data Envelopment Analysis;

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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