Determinants of bank efficiency: evidence from the Latin American banking industry

Abstract

Purpose: The purpose of this paper is to analyze a variety of factors that can explain the differences in commercial bank efficiency among 17 countries in Latin America (LatAm). Design/methodology/approach: In a first stage, data envelopment analysis (DEA) and conditional efficiency analysis techniques are used to assess the relative efficiency level of 409 banks for the 2014-2016 period. The conditional efficiency approach considers environmental variables (that are beyond the manager’s control), which could influence the shape and the level of the boundary of the attainable set. In the second stage, the resulting conditional efficiency scores are correlated with internal variables (those that are under the manager’s control), which might affect the distribution of the inefficiencies. For this purpose, an econometric approach developed by Simar and Wilson (2007) is used. Findings: First stage scores reveal the heterogeneity of average efficiency within the region. Regarding the factors that may explain the differences in performance in the LatAm banking sector, the results allow us to state that certain internal variables such as bank size, the ratio of loans to total assets and the ratio of non-performing loans show the expected relationship to efficiency, in line with much of the previous literature. Originality/value: This is the first time that conditional efficiency and Simar and Wilson (2007) approaches have been applied at the same time to analyse the LatAm banking industry.