Identifying bank outputs and inputs with a directional technology distance function

Paolo Guarda, Abdelaziz Rouabah () and Michael Vardanyan

Journal of Productivity Analysis, 2013, vol. 40, issue 2, 185-195

Abstract: The bank efficiency literature lacks an agreed definition of bank outputs and inputs. This is problematic given the long-standing controversy concerning the status of deposits, but also because bank efficiency estimates are known to be affected by the inclusion of additional outputs such as non-traditional (fee-based) activities or risk measures. This paper proposes a data-driven identification of bank outputs and inputs using the directional technology distance function. While previous applications of this tool used symmetric expansion or contraction directions, we focus on a set of orthogonal directions, each corresponding to an assumption on the input/output status of an individual variable. These directions correspond to a set of different specifications, whose estimated coefficients can be used to determine the input or output status of all variables except the regressand. Our empirical analysis revealed a very consistent pattern across the alternative specifications estimated. There is strong evidence that customer deposits are an input, and that non-performing loans are an important undesirable output. Finally, the orthogonal expansions/contractions we consider avoid the simultaneity problem raised by the “convenient normalization” commonly used to impose linear homogeneity in stochastic frontier estimation. Copyright Springer Science+Business Media New York 2013

Keywords: Distance functions; Efficiency; Banking; Parameterization; C13; D24; G21 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:jproda:v:40:y:2013:i:2:p:185-195

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DOI: 10.1007/s11123-012-0326-7

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