Bayesian Nonparametric Inference in Bank Business Models with Transient and Persistent Cost Inefficiency

Dimitris Korobilis, Emmanuel C. Mamatzakis () and Vasileios Pappas ()

No No 03/2025, Working Papers from Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School

Abstract: This paper introduces a novel econometric framework for identifying and modeling bank business models (BBMs), which dynamically evolve in response to changing financial and economic conditions. Building on the stochastic frontier literature, we extend the traditional cost-efficiency models by decomposing inefficiency into persistent and transient components. We propose a Bayesian nonparametric approach that adapts to the data through an infinite mixture model with predictor-dependent clustering, enabling a flexible classification of banks into distinct business models. Our method, based on the Logit Stick-Breaking Process (LSBP), provides a data-driven way to capture the heterogeneity in bank strategies, allowing for dynamic transitions between business models over time. This model offers a significant advancement over existing parametric and kernel-based approaches by combining the scalability of nonparametric methods with efficient computational routines. We apply the model to a dataset of European banks and identify four distinct business model clusters, providing novel insights into the evolution of bank performance and efficiency. Our findings contribute to the growing literature on the identification and measurement of bank business models, offering valuable implications for policy and regulatory frameworks.

Pages: 47 pages
Date: 2025-03
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://hdl.handle.net/11250/3183691

Related works:
Working Paper: Bayesian Nonparametric Inference in Bank Business Models with Transient and Persistent Cost Inefficiency (2025)
Working Paper: Bayesian Nonparametric Inference in Bank Business Models with Transient and Persistent Cost Inefficiency (2025)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bny:wpaper:0138

Access Statistics for this paper

More papers in Working Papers from Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School Contact information at EDIRC.
Bibliographic data for series maintained by Helene Olsen ().