The implications of latent technology regimes for competition and efficiency in banking

Michael Koetter and Tigran Poghosyan

No 2008,15, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank

Abstract: Banks continue to differ in many ways, for instance with respect to business models, growth strategies, or financial health. Neglecting these differences confuses inefficiency with heterogeneity while sub-sample estimation prohibits efficiency comparisons across different samples. We use a latent class stochastic frontier model to estimate simultaneously multiple technology regimes and group membership probabilities. The latter are conditioned on six bank traits of German banks and we identify four signifficantly different technology regimes. Only small, retail focused banks exhibit cost inefficiencies, which are 5.4% on average and thus substantially lower compared to previous studies. We use technology regime specific cost parameters to measure competition with Lerner indices. Large, national universal banks and the smallest, most specialized banks exhibit the lowest level of competition. In turn, medium sized universal banks are both efficient and exhibit the lowest Lerner margins between 1994 and 2004.

Keywords: Banks; competition; efficiency; latent class frontier; strategy (search for similar items in EconPapers)
JEL-codes: G21 L1 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-ban, nep-com, nep-cse and nep-eff
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp2:7325

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