Operational efficiency in banking: An international comparison

In this paper, we estimate a global cost function for international banks to test for both input and output inefficiencies, Our results for 1988-1992 suggest that for banks in 15 countries, the prevalence of input X-inefficiencies far outweighs that of output inefficiencies (as measured by economies of scale and scope). Moreover, our results suggests that the distribution-free model overestimates the magnitude of X-inefficiencies relative to the stochastic cost frontier approach. Large banks in separated banking countries (that prohibit the functional integration of commercial and investment banking) had the largest measure of input inefficiency amounting to 27.5 percent of total costs as well as significant levels of diseconomies of scale, All other banks have X-inefficiency levels ranging in the area of fifteen percent of total costs with slight economies of scale for small banks.