METHODOLOGICAL APPROACH TO THE STUDY OF X-EFFICIENCIES AND SCALE ECONOMIES IN BANKING: ARE SMALLER BANKS MORE EFFICIENT THAN LARGER BANKS ?
ADOLPHUS J.TOBY, Ph.D.
Faculty Member
Department of Banking and Finance
Rivers State University of Science and Technology
Port Harcourt, NIGERIA
Abstract
This paper surveys the parametric and non-parametric approaches adopted in estimating x-efficiencies and scale economies in banking. Specifically, the traditional stochastic cost frontier and Data Envelopment Analysis (DEA) methodologies, including recent refinements incorporating the profit efficiency frontier and a profitability test are also extensively reviewed. Recent empirical studies covering the late 1990s and early 2000s, and countries other than the U.S. are also reviewed and compared with the findings of earlier studies (1980s and early 1990s). The results are still mixed, suggesting more questions than answers. To a large extent the empirical evidence seems to support the view that smaller banks are more efficient than larger banks in most countries. The exceptional cases
of cost efficiencies reaped by larger banks may be simply due to sheer size and market power The pursuit of consolidation and deregulation of the banking system should therefore be implemented with caution, particularly in developing banking systems.
Key words: X-efficiency: Scale efficiency; Data Envelopment Analysis (DEA); Profit efficiency frontier
JEL Classification; C12; G2I; NIO
Introduction
The concept of scale efficiency was first introduced by Farrell, which can be simply defined as the relationship between a bank#39;s per unit average production cost and volume. Thus, a bank is said to have economies of scale when an increase in output is accompanied by a lower unit cost of production. The concept of x-efficiency, which was popularised by Leibenstein, refers to deviations from the cost-efficient frontier that depicts the lowest production cost for a given level of output. X-efficiency stems from technical efficiency, which gauges the degree of friction and waste in the production processes, and allocative efficiency, which measures the levels of the various inputs. These two are neither scale nor scope dependent and thus X-efficiency is a measure of how well management is aligning technology, human resources management, and other resources to produce given levels of output. Moreover, the literature distinguishes two main approaches in measuring banking efficiency: a parametric and a non-parametric approach in which the specification of a production cost function is required in both approaches. The parametric approach engages in the specification and econometric estimation of a statistical or parametric function, while the non-parametric method offers a linear boundary by enveloping the experimental data points, known as 'Data Envelopment Analysis' (DEA).
The evolving structure of the Nigerian banking industry will depend on what types of depository institutions can remain profitable over time. Among the primary determinants of profitability will be the extent that production economies and resultant cost reductions can be achieved as firms expand their operations. If extensive cost reductions are possible, large diversified firms will potentially be more profitable than small specialised institutions. Financial institutions in general, and commercial banks in particular, have experienced increasing difficulties since the 1980s. This is especially true in developing countries where banks have proved quite vulnerable to financial shocks, both internally and externally. Faced with mounting competition, examinations of bank efficiency have become an important inquiry for public and policy-makers alike. Berger and Humphrey survey 130 studies that apply frontier-efficiency analyses to financial institutions in more than 20 different countries. They report that the majority of these studies are confined to the U.S. banking industry, and call for the need to examine the efficiency of banks outside the United States. For the U.S., the body of evidence indicates that banks are generally inefficient, although small banks fare better than larger banks on the efficiency score list. [See also Fierrier and Lovell, and Daniels and Tirtiroglu].
The purpose of this paper is three-fold. First, we review bank efficiency studies in countries other than the U.S., particularly within the 2000-2005 period. Second, we also present methodological refinements including (1) distinguishing clearly between the concepts of cost efficiency and profit efficiency and (2) subjecting our cost efficiency measures derived from the Fourier model to a profitability test as a way of identifying banks that are both cost - and profit-efficient and (3) the policy implications for the long-run survival of big and small banks would also be highlighted.
Research Findings
The Data Envelopment Analysis (DEA) approach was pioneered by Chames, et al,#39;#39;, and later extended by Banker et al (1984). DEA decomposes cost (input saving) efficiency into technical and allocative efficiencies. It also allows the decomposition of technical efficiency into pure technical efficiency and scale efficiency. The Malmquist index is commonly used to assess bank#39;s productivity changes. In order to identify possible causes behind productivity changes, the latter is usually decomposed into technical and technological changes.
DEA is a linear programming technique that maps a piecewise linear convex isoquant (a non-parametric surface frontier) over data points to determine the efficiencies of each of the decision-making units (DMUs) relative to the isoquant. The objective of DEA is to measure a relative efficiency among similar units (DMUs) that share the same technology (proc
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METHODOLOGICAL APPROACH TO THE STUDY OF X-EFFICIENCIES AND SCALE ECONOMIES IN BANKING: ARE SMALLER BANKS MORE EFFICIENT THAN LARGER BANKS ?
关于银行业X效率与规模经济的研究：小型银行比大型银行更高效吗？
ADOLPHUS J.TOBY, Ph.D.
Faculty Member
Department of Banking and Finance
Rivers State University of Science and Technology
Port Harcourt, NIGERIA
ADOLPHUS J.TOBY博士
教职人员
银行和金融部门
国家科学技术大学
尼日利亚哈科特港
Abstract
This paper surveys the parametric and non-parametric approaches adopted in estimating x-efficiencies and scale economies in banking. Specifically, the traditional stochastic cost frontier and Data Envelopment Analysis (DEA) methodologies, including recent refinements incorporating the profit efficiency frontier and a profitability test are also extensively reviewed. Recent empirical studies covering the late 1990s and early 2000s, and countries other than the U.S. are also reviewed and compared with the findings of earlier studies (1980s and early 1990s). The results are still mixed, suggesting more questions than answers. To a large extent the empirical evidence seems to support the view that smaller banks are more efficient than larger banks in most countries. The exceptional cases
of cost efficiencies reaped by larger banks may be simply due to sheer size and market power The pursuit of consolidation and deregulation of the banking system should therefore be implemented with caution, particularly in developing banking systems.
Key words: X-efficiency: Scale efficiency; Data Envelopment Analysis (DEA); Profit efficiency frontier
摘要
本文综述了在研究银行业X-效率与规模经济时采用的参数估计法与非参数估计法。特别是广泛阐述了传统的随机成本前沿和数据包络分析法，包括最近被纳入利润效率前沿和利润测试的改进。最近对20世纪90年代末和21世纪初以及美国以外的国家也进行了实证研究, 并与早期研究 (20世纪80年代和90年代初) 结果进行了比较。结果参差不齐, 提出的问题多于答案。在很大程度上, 经验证据似乎支持这样一种观点, 在大多数国家, 小型银行比大型银行更具效率。但值得注意，大型银行所获得的成本效益可能仅仅是由于自身规模和市场力量的原因, 因此,应谨慎的执行银行系统的合并与放松管制,特别是在开发银行系统方面。
关键词：X-效率：规模效率；数据包络分析法；利润效率前沿
Introduction
The concept of scale efficiency was first introduced by Farrell, which can be simply defined as the relationship between a bank#39;s per unit average production cost and volume. Thus, a bank is said to have economies of scale when an increase in output is accompanied by a lower unit cost of production. The concept of x-efficiency, which was popularised by Leibenstein, refers to deviations from the cost-efficient frontier that depicts the lowest production cost for a given level of output. X-efficiency stems from technical efficiency, which gauges the degree of friction and waste in the production processes, and allocative efficiency, which measures the levels of the various inputs. These two are neither scale nor scope dependent and thus X-efficiency is a measure of how well management is aligning technology, human resources management, and other resources to produce given levels of output. Moreover, the literature distinguishes two main approaches in measuring banking efficiency: a parametric and a non-parametric approach in which the specification of a production cost function is required in both approaches. The parametric approach engages in the specification and econometric estimation of a statistical or parametric function, while the non-parametric method offers a linear boundary by enveloping the experimental data points, known as 'Data Envelopment Analysis' (DEA).
引言
规模效率的概念最初是由Farrell提出的, 可以简单地定义为银行单位平均生产成本与产量之间的关系。因此, 当产出增加伴随着单位生产成本的降低,这时银行可以说具有规模经济。Leibenstein推广的X-效率概念是指偏离成本效益的前沿, 即在给定的产出水平下, 生产成本最低。X-效率源于技术效率, 它衡量生产过程中的损耗和浪费程度, 以及配置效率, 即衡量各种投入的水平。这两者既不依赖规模, 也不依赖范围, 因此X-效率是衡量管理层如何协调技术、人力资源管理和其他资源以产出给定产出水平的一个指标。此外, 文献还区分了衡量银行效率的两种主要方法:参数法和非参数法,两种方法都需要指定生产成本函数。参数法涉及统计或参数函数的规范估算, 而非参数法通过包围实验数据点提供线性边界，称为 '数据包络分析(DEA)。
The evolving structure of the Nigerian banking industry will depend on what types of depository institutions can remain profitable over time. Among the primary determinants of profitability will be the extent that production economies and resultant cost reductions can be achieved as firms expand their operations. If extensive cost reductions are possible, large diversified firms will potentially be more profitable than small specialised institutions. Financial institutions in general, and commercial banks in particular, have experienced increasing difficulties since the 1980s. This is especially true in developing countries where banks have proved quite vulnerable to financial shocks, both internally and externally. Faced with mounting competition, examinations of bank efficiency have become an important inquiry for public and policy-makers alike. Berger and Humphrey survey 130 studies that apply frontier-efficiency analyses to financial institutions in more than 20 different countries. They report that the majority of these studies are confined to the U.S. banking industry, and call for the need to examine the efficiency of banks outside the United States. For the U.S., the body of evidence indicates that banks are generally inefficient, although small banks fare better than larger banks on the efficiency score list. [See also Fierrier and Lovell, and Daniels and Tirtiroglu].
尼日利亚银行业结构的发展将取决于哪种类型的存款机构能够长期保持盈利。决定盈利能力的主要因素之一是，当公司扩大经营时，可在多大程度上实现生产经济并由此降低成本。如果能够大幅降低成本，大型多元化公司将可能比小型专业机构更具盈利能力。一般来说，金融机构，特别是商业银行，自20世纪80年代以来经历了越来越多的困难。在发展中国家尤其如此，银行在内部和外部都非常容易受到金融冲击的影响。面对日益激烈的竞争，对银行效率的考核已成为公众和决策制定者的一个重要调查。Berger和Humphrey调查了130项研究，将前沿效率分析应用于20多个不同国家的金融机构。他们报告说，这些研究大多局限于美国银行业，并呼吁有必要检查美国以外的银行的效率。对美国而言，大量证据表明，银行普遍效率低下，尽管在效率评分表上，小型银行的表现好于大型银行。[参见Fierrier、Lovell、Daniels和Tirtiroglu]。
The purpose of this paper is three-fold. First, we review bank efficiency studies in countries other than the U.S., particularly within the 2000-2005 period. Second, we also present methodological refinements including (1) distinguishing clearly between the concepts of cost efficiency and profit efficiency and (2) su
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