Bank efficiency, profitability and equity capital: evidence from developing countries

Transcription

1 American J. Finance and Accounting, Vol. 2, No. 2, Bank efficiency, profitability and equity capital: evidence from developing countries Sok-Gee Chan* Institute of China Studies, University of Malaya, Kuala Lumpur 50603, Malaysia *Corresponding author Mohd Zaini Abd Karim Institute for Economic Analysis and Forecasting, College of Arts and Sciences, Universiti Utara Malaysia, Sintok 06010, Kedah, Malaysia Abstract: This paper analysed the effects of profitability and equity capital on bank efficiency of commercial banks in the developing countries. To achieve the objectives, the stochastic frontier approach is used in the first stage of the analysis to obtain cost and profit efficiency scores. In the second stage, the efficiency scores obtained are regressed with a measure of bank s equity capital and profitability by using the Tobit regression model. The results show that equity to total assets ratio has a negative effect on efficiency indicating that either the use of debts in financing bank operations or less regulatory condition contribute to higher efficiency. The results also found that return on assets have a positive effect on profit efficiency suggesting the needs for efficient utilisation of banks assets. Keywords: bank efficiency; profitability; equity capital; stochastic frontier; tobit regression. Reference to this paper should be made as follows: Chan, S-G. and Karim, M.Z.A. (2010) Bank efficiency, profitability and equity capital: evidence from developing countries, American J. Finance and Accounting, Vol. 2, No. 2, pp Biographical notes: Sok-Gee Chan is a Senior Lecturer at the Institute of China Studies, University of Malaya. She obtained her PhD in Economics from Universiti Utara Malaysia. Currently, she is actively involved in research related to banking efficiency and government spending efficiency. Mohd Zaini Abd Karim is a Professor of Economics at the Institute of Economic Analysis and Forecasting, Universiti Utara Malaysia. His research interests include efficiency and productivity studies, economics of banking and financial market, and market structure and firm behavior. His publications appeared in Global Economic Review, Prague Economic Papers, Applied Econometrics and International Development, ASEAN Economic Bulletin and other academic journals. Copyright 2010 Inderscience Enterprises Ltd.

2 182 S-G. Chan and M.Z.A. Karim 1 Introduction The study of banking efficiency is important as banks play a vital role in ensuring the smoothness of monetary policy transmission particularly in the developing countries. Firms in the developing countries depend heavily on direct financing due to the underdeveloped capital markets. Furthermore, the wave of globalisation and liberalisation in the financial markets exerts competitive pressure on banking firms in the developing countries (Carvallo and Kasman, 2005; Karim, 2001). Hence the efficiency of banking industry becomes a major concern for most regulators in the developing countries in developing a sound banking industry. This study analysed the effects of profitability and equity capital on bank efficiency of commercial banks in the developing countries. This is essential when the structure of bank s profit changes due to dramatic changes in their internal and regulatory structure resulting from deregulation (Humphrey and Pulley, 1997). In addition, the results from the analysis of bank efficiency could be misleading with the exclusion of these variables in the model as banks might have different business models and risk preferences (DeYoung et al., 2004; Mester, 1996). As such, the inclusion of variables, such as equity capital and profitability, in this study may provide answers to the causes of bank efficiency in the developing countries. In addition, Bos and Kool (2006) argued that even though banking institutions might operate in an identical legal and institutional framework, large differences do exist in terms of bank characteristics. Hence the estimation of bank efficiency level could be misleading without controlling for equity capital and profitability variables (Bos and Kool, 2006; Maudos and Pastor, 2001). This study also includes off-balance sheet activities as one of the outputs in estimating bank efficiency. The product mix in the banking business changed dramatically since the mid-1980s, in which banks started to engage the use of off-balance sheet activities as a tool for risk management. Besides that, off-balance sheet products are used to satisfy the increase in demand for non-banking products by customers. However, the use of off-balance sheet products in the banking industry might result in excessive risk taking and additional cost to the public if it is not being managed efficiently. Consequently, the use of off-balance sheet activities will cause banks to expand to a potentially inefficient level (Jagtiani and Khanthavit, 1996). Rogers (1998) also pointed out that banks efficiency level tend to be understated with the exclusion of off-balance sheet activities. This paper proceeds as follows. Section 2 provides a background of the banking system in the developing countries. Section 3 reviews related studies on bank efficiency and regulatory condition and performance. Section 4 discusses the methodology and data. Section 5 discusses the empirical results. Section 6 concludes. 2 Banking systems in the developing countries It has been a challenge for the authorities of the banking industry in the Asian region as most of the banks consist of government- and family-owned especially in countries such as Thailand, Indonesia, India, Hong Kong and China. This is because the practices of government- and family-owned banks might prohibit banks to allocate their resources efficiently since they are required to fulfil both public- and self-interest. These challenges

3 Bank efficiency, profitability and equity capital 183 have been more pronounce with the intense competition brought about by globalisation and financial liberalisation. Unlike Asia, banking industry in the Middle East is known as one of the world s fastest growing banking and capital markets by providing better infrastructure and credit facilities. Tremendous development of the banking system can be seen especially in the Gulf Cooperation Council (GCC) countries due to a more competitive environment with less direct government intervention, low market concentration and more openness to foreign banks. However, a major challenge in the middle-eastern region as a whole is the unequal development of the banking and financial markets. Some of the countries are still dominated by publicly owned banks with high level of government intervention in terms of credit allocation. This resulted in losses, liquidity issues and wide interest rate spreads in the banking system. In addition, the region is also characterised with a highly concentrated banking sector in countries such as Saudi Arabia, Pakistan, Kuwait, Israel, Algeria, Bahrain, Jordan, Qatar and Iran with three-bank concentration ratio of more than 60%. This remains as the biggest challenge since high concentration might lead to inefficient banks management. In Africa, countries such as Kenya, Nigeria, Uganda and Zambia suffer from banking failure due to unstable political environment, corruption issues and the dependency on international banking institutions for financing. Corruption such as fraud and abuse of banking operations by the bank s authorities and management is common due to poor enforcement of regulations. 3 Literature review There are not many studies done in analysing the effect of profitability and equity capital on efficiency. Maudos et al. (2002) examine banks profitability and efficiency in 11 European countries from 1993 to The results of their analysis suggest that return on assets is positively related to profit efficiency. This result is supported by Hassan (2005) in his study of X-efficiency in the Islamic banking system. Mester (1996) and Berger and Mester (1997) studied bank efficiency correlates of commercial banks in the USA by looking at the impact of capital asset ratios on cost efficiency. Mester (1996) reported that capital asset ratio is negatively related to cost inefficiency. This result is supported by Altunbas et al. (2007) from their study on European banks. In addition, similar results were also found by Berger and Mester (1997), Girardone et al. (2004) and Casu and Girardone (2004) in their study on the US banking system. Similar results were also found by Chang and Chiu (2006) in their study on the Taiwanese banking industry and by Perera et al. (2007) in South Asia as well as Kablan (2007) in the West African Economic Monetary Union (WAEMU) countries. According to Berger and Mester (1997), the positive relationship between capital ratio and cost efficiency indicates that efficient banks tend to have higher profit and hence higher equity-to-asset ratios resulting from higher retained earnings. In addition, the reduction in the level of financial capital might create moral hazard as managers of the inefficient banks will have less incentive to run the banks efficiently and expose banks to excessive risk taking activities. From the studies reviewed, most studies on the effect of profitability on bank efficiency are done either for a single country or in the developed countries. Furthermore, the relationship between equity to capital ratio and bank efficiency is still inconclusive.

4 184 S-G. Chan and M.Z.A. Karim Therefore, this study fills the gap by analysing the effect of banks equity capital and profitability on bank efficiency in a wider set of developing countries. 4 Methodology and data 4.1 Methodology This study employed a two-stage approach in analysing the effects of profitability and equity capital on bank efficiency. The stochastic frontier approach (SFA) proposed by Aigner et al. (1977), Meeusen and van den Broeck (1977) and Battese and Corra (1977) are used in the first stage of analysis to obtain cost and profit efficiency scores for all the commercial banks in the sample. SFA is superior compared to other measures because the core or average efficiency for each firm is assumes to vary over time. This is crucial due to the assumption that bank-specific inefficiencies do not persist over time as highlighted by Fries and Taci (2005). The cost frontier is estimated using the stochastic frontier models based on the translog specification as shown in Equation (1) ln C ln q ln q q ln r ln q kt 0 i l ij ikt jkt ij ikt jkt 2 i1 i1 j1 i1 j ln r ln r ln r v u i ikt ij ikt jkt kt kt 2 i1 i1 j1 (1) where ln C kt is the natural logarithm of total cost of firm k at time t; r ikt is the natural logarithm of the input price (r i ) for input factor i (i = 1,, 3) of bank k at time t; q ikt is the natural logarithm of the output i (i = 1,, 4) of bank k at time t and vkt and u kt are the inefficiency and random error terms. The homogeneity of input prices is ensured by imposing restrictions for the following 3 parameters: 1 i1 i and i1 j1 ij (i = 1, 2, 3), i1 j1 ij for all i. Furthermore, the symmetry requirement need is ensured by setting ij and ji ij. ji The restrictions are applicable for translog specification for the estimation of both cost and profit efficiency. The profit function in this study follows the concept of alternative profit efficiency. Net income is calculated by summing both the interest and non-interest income minus operating expenses and taxes. This value is used as the proxy for banks profit. Fan and Shaffer (2004) argued that net income provides a closer representation in the estimate of operational profit. To overcome the problem of negative profit, a constant is added into min min the net income. Hence the dependent variable is defined as ln( 1) where is the absolute value of minimum profits,. The random error term v kt is assumed to be i.i.d, normally distributed and independent of the explanatory variables. In the cost efficiency model, the random error is defined as v u. In this case, a firm specific cost efficiency estimate is given by kt kt kt

5 Bank efficiency, profitability and equity capital the mean of the unconditional distribution of v kt given kt that is { E[exp( ukt ) kt} which takes the value between 0 and 1. In the profit efficiency model, the random error follows kt vkt ukt. The firm specific profit efficiency is defined as the mean of the unconditional distribution of u given kt or kt E[exp( ukt ) kt ], also takes the value between 0 and 1. In ensuring the accuracy and persistency of the estimated efficiency scores, the -flexible functional form by Gallant (1981, 1982) is employed in addition to the standard translog specification. Gallant (1981) pointed out that the estimation of flexible form allows for asymptotically approximation of any continuous function and thus able to approximate the true function to achieve Sobolev-flexibility. In addition, the combination of polynomial and trigonometric expansion allows the inferences drawn from the estimation to be free from specification errors. The equation for -flexible functional form proposed by Berger and DeYoung (1997), Berger and Mester (1997) and Akhigbe and McNully (2003) is presented as follows: kt kt 0 i l 2ij ikt jkt ij ikt jkt i1 i1 j1 i1 j ln C ln C ln q ln q q ln r ln q 1 ln r ln r ln r cos z sin z z z sin z z i ikt ij ikt jkt i i i i 2 i1 i1 j1 i1 4 4 cos i1 j1 4 4 i1 ji k j ij i j ij i j z z z sin z z z ijk cos i j k ijk i j k kt where ln C kt is the natural logarithm of total cost of firm k at time t; r ikt is the natural logarithm of the input price (r i ) for input factor i (i = 1,, 3) of bank k at time t; q ikt is the natural logarithm of the output i (q i, i = 1,, 4) of bank k at time t; z is the adjusted i values of the log output lnq i such that they span the interval [0.1 2, 9 2]. Formula for z used = i (0.2 a ln Q i ) where [a, b] is the range of lnq i and ( )/(b 1) ;,, and are the parameters to be estimate and kt is the error term of the two components in the equation. Profit efficiency is also estimated in a similar manner by substituting the total cost with net income as prescribed in the translog specification and -flexible functional form in Equations (1) and (2), respectively. Both functions are estimated using the normal-gamma model introduced by Greene (1990) with the following specifications: P f( u) (3) P 1 ( P)exp( u) u To determine whether profitability and equity capital affects banking efficiency in the developing countries, the efficiency scores obtained is regressed with both variables in the second stage. The Tobit regression model is employed since the dependent variable, (2)

6 186 S-G. Chan and M.Z.A. Karim efficiency score, is between 0 and 1. The other independent variable chosen in this study to act as a control is loan loss provision. The efficiency equation estimated is as follows: Effi LLP EQUITY ROA ROE (4) jt ijt 1 ijt 2 ijt 3 ijt 4 ijt ijt where Eff ijt is the efficiency score for i bank in country j at time t; LLP ijt is the loan loss provision to total loan for i bank in country j at time t; EQUITY itj is the total equity to total assets for i bank in country j at time t; ROA ijt is the return on assets for i bank in country j at time t; ROE ijt is the return on equity for i bank in country j at time t and ijt is the error term for i bank in country j at time t. 4.2 Sample and data This study consists of a sample of selected commercial banks from 36 developing countries in the Asian, Middle Eastern/North African and African region from year 2000 to The list of countries included in this study is presented in Table 1. Only commercial banks that have more than three years of complete dataset are included in the sample to provide a more accurate and precise measure of cost and profit efficiency. The efficiency scores for both cost and profit are estimated by employing the unbalanced panel data approach. All data are extracted from the banks balance sheet and income statement downloaded from IBCA Bankscope database. Table 1 List of sample countries in the Asia, Middle East/North Africa and Africa Asia Middle East and North Africa Africa 1 Bangladesh 1 Algeria 1 Cameroon 2 Hong Kong 2 Bahrain 2 Ethiopia 3 India 3 Iran 3 Gambia 4 Indonesia 4 Israel 4 Ghana 5 Kazakhstan 5 Jordan 5 Mauritania 6 Macau 6 UAE 6 Nigeria 7 Malaysia 7 Kuwait 7 Zambia 8 Mongolia 8 Lebanon 8 Ivory Coast 9 Pakistan 9 Morocco 10 Philippines 10 Oman 11 Taiwan 11 Qatar 12 Thailand 12 Saudi Arabia 13 Uzbekistan 13 Tunisia 14 Vietnam 14 Turkey

7 Bank efficiency, profitability and equity capital Definition of variables Based on the value-added approach proposed by Berger and Humphrey (1992), we employ three inputs vector namely, labour, capital and loanable funds. The price of labour is measured by dividing total personnel expenses to total assets of the bank. The price of physical capital is calculated by dividing total depreciation and other capital expenses by total fixed assets. The ratio of the total interest expenses on deposits and non-deposit funds to total loanable funds is used as a proxy for price of loanable funds. On the other hand, the output vectors consist of both traditional and non-traditional banking activities of the commercial banks. The output vectors employed are total deposits, loans, investments and off-balance sheet activities. The off-balance sheet activities are important element as banks used it for risk management in today s modern financial economy. Total costs used in this study consist of operating and financial costs and profit after taxes is used to represent the banks profit. All outputs, costs and profits are in USD million. In the second stage of analysis, we used Tobit regression to analyse the impact of equity capital and profitability variables on both cost and profit efficiency of commercial banks. The banks performance is measured using return to equity and return on assets. As suggested by Mester (1993), bank s performance should have positive relationship with bank efficiency level as more efficient banks should exhibit greater profit earnings. Equity to total assets ratio is used as a measure of regulatory condition. The relationship between equity to capital ratio and bank efficiency could be either positive or negative depending on the banks management of equity capital and distribution of risk across banks (Kahane, 1977; Koehn and Santomero, 1980). Berger and DeYoung (1997) suggest that higher capital ratio indicates higher bank s solvency and prudentiality. In addition, Park and Weber (2006) highlighted that a positive relationship is possible as increase in capital ratio will increase customers confidence due to reduce risk exposure and cost to manage the leverage. In addition, Berger (1995) points out that capital ratio is positively related to bank efficiency as increase in bank s capital ratio may reduced banks equity risk and expected return on equity by investors. On the other hand, a negative relationship could be expected if tighter regulatory control on banks capital requirement restricts banking operation to expand to their efficient level. Finally, according to Laeven and Majnoni (2003), the ratio of loan loss provisions is used as a proxy for assets quality and it is expected to be negatively related with bank efficiency as additional costs are required to manage low quality assets. 5 Empirical results 5.1 Estimated cost and profit efficiency The estimation results of cost and profit efficiency from both translog and flexible form are summarised in Table 2. The results show that commercial banks in the Middle Eastern/North African region are the most cost-efficient among the regions studied. The reported average cost efficiency score of commercial banks in the Middle Eastern/North African region is 90.94% using the translog specification and 80.88% using the -flexible form. This indicates that the commercial banks in this region wasted less than 20% of inputs in their outputs production.

8 188 S-G. Chan and M.Z.A. Karim Table 2 Descriptive statistics on the average cost efficiency scores by region ( ) Descriptive statistics Estimation methods Middle East/North Africa Asia Africa Cost efficiency Mean SD Minimum Maximum Profit efficiency Mean SD Minimum Maximum On the other hand, cost efficiency scores obtained using the -flexible functional form suggests that commercial banks in Africa are the most cost-efficient followed by commercial banks in the Middle Eastern/North African region. The results of the efficiency ranking seem to be different between the cost efficiency scores obtained from translog specification and -flexible functional form. This might due to the differences in means and variances in efficiency scores obtained from the translog specification and the -flexible functional form. The banks in the Middle Eastern/North African region show the highest cost efficiency might be due to the reason that most of the countries in the region enjoy significant improvement in economic activities as reported by the International Monetary Funds (IMF, 2007) authority. Commercial banks in the Asian region seem to be the most profit efficient as compared to the other two regions with average efficiency scores of 88.35% from the translog model and 86.94% from the -flexible form model. This is followed by commercial banks in the Middle Eastern/North African region and finally, commercial banks in the African region. The results are consistent for both translog specification and -flexible functional form. The highest profit efficiency scores obtained by commercial banks in the Asian region might be due to the region s strong economic fundamentals especially in countries such as Hong Kong, Taiwan and Malaysia which served as the financial centres in the region.

9 Bank efficiency, profitability and equity capital Effect of profitability and equity capital on bank efficiency The bank s cost and profit efficiency scores obtained are regressed with both profitability and equity capital variables to determine the impact of both variables on bank efficiency. The estimation was done for the full sample and also on each sample independently (Asian, Middle Eastern/North African and African region). The results of the estimation for the full sample are presented in Tables 3 and 4, respectively. The results in Tables 3 and 4 indicate that equity to total assets ratio is negatively related to cost and profit efficiency of commercial banks and it is statistically significant at 1% significance level. This indicates that the lower the capital requirements, the higher the cost and profit efficiency. In other words, the use of leverage seems to be beneficial for commercial banks in the developing countries as a whole. This might be due to the reason that bank s management has to exercise extra caution in their generation of profits and cost control to pay off their long-term obligations. The return on assets is positively correlated with cost and profit efficiency scores. The result suggests that banks become more efficient when they are more profitable since they have better control of their capital expenses. Table 3 Tobit regression of cost efficiency on profitability and equity capital (full sample) Dependent: cost efficiency scores Constant Equity/total assets *** *** ROA *** ROE Loan loss provision/total Loans Table 4 Tobit regression of profit efficiency on profitability and equity capital (full sample) Dependent: profit efficiency scores Constant Equity/total assets *** ROA *** *** ROE *** Loan loss provision/total Loans

10 190 S-G. Chan and M.Z.A. Karim The estimation results for the Asian region are presented in Tables 5 and 6. The results revealed that cost and profit efficiency are negatively related to the ratio of equity to total assets. The results indicate that the used of leverage increased bank efficiency in the region. The return on asset is also positively related to both cost and profit efficiency of commercial banks in the Asian region in both translog and function. Table 5 Tobit regression results of cost efficiency on profitability and equity capital (Asian region) Dependent: cost efficiency scores Constant Equity/total assets *** ** ROA *** ROE Loan loss provision/total Loans Table 6 Tobit regression results of profit efficiency on profitability and equity capital (Asian region) Dependent: profit efficiency scores Constant Equity/total assets *** *** ROA *** *** ROE Loan loss provision/total Loans

11 Bank efficiency, profitability and equity capital 191 Next, the estimation results for the Middle Eastern/North African region are presented in Tables 7 and 8, respectively. Similar to the case of Asian region, the results show that the equity to total assets ratio is negatively related to both cost and profit efficiency of the commercial banks. Therefore, one can conclude that commercial banks in the Middle Eastern/North African regions can boost their efficiency level with the utilisation of leverage through the used of debt financing rather than equity capital. Likewise, return on assets is found to exert a strong positive influence towards cost and profit efficiency of commercial banks for this region. Table 7 Tobit regression results of cost efficiency on profitability and equity capital (Middle Eastern/North African region) Dependent: cost efficiency scores Constant Equity/total assets *** ,156*** ROA *** ROE Loan loss provision/total loans Table 8 Tobit regression results of profit efficiency on profitability and equity capital (Middle Eastern/North African region) Dependent: profit efficiency scores Constant Equity/total assets *** ROA *** *** ROE *** Loan loss provision/total Loans **

12 192 S-G. Chan and M.Z.A. Karim Finally, the results for the African region are presented in Tables 9 and 10, respectively. The estimation results indicate that the equity to total assets ratio is negatively related to cost and profit efficiency. This is consistent with the results obtained for the other two regions as discussed previously. Table 10 shows that the loan to total assets ratio exert a positive impact on profit efficiency of the commercial banks in this region. Likewise, the return on assets is also found to have a positive relationship with the profit efficiency. Table 9 Tobit regression results of cost efficiency on profitability and equity capital (African region) Dependent: cost efficiency scores Constant Equity/total assets *** ROA ROE Loan loss provision/total Loans Table 10 Tobit regression results of profit efficiency on profitability and equity capital (African region) Dependent: profit efficiency scores Constant Equity/total assets *** ROA *** ROE ** Loan loss provision/total loans

13 Bank efficiency, profitability and equity capital Conclusion The results show that commercial banks in the Middle Eastern/North African region are the most cost-efficient among the regions studied. This might be due to the reason that most of the countries in the region enjoy significant improvement in economic activities as reported by the IMF (2007) authority. Commercial banks in the Asian region seem to be the most profit efficient as compared to the other two regions with average efficiency scores of 88.35% from the translog model and 86.94% from the -flexible form model. This might be due to the region s strong economic fundamentals especially in countries such as Hong Kong, Taiwan and Malaysia which served as the financial centres in the region. It is found that the profitability and equity capital did influence the efficiency level of commercial banks in the three regions under analysis. The results found a negative relationship between equity to total assets ratio and efficiency for commercial banks in Asian, Middle Eastern and North African and African region. This shows that increase in the usage of debts relative to equity in financing bank operations contribute to higher efficiency. This might indicate that the used of debts force managers to manage banks in a more cautious way because bank bears the obligation to pay back the creditors. Hence careful strategy should be taken to increase their earnings through reducing operating costs and increase in profits to generate sufficient funds in paying of their creditors and to attract more depositors in the future. This is consistent with the results of Akhigbe and McNully (2003), Fan and Shaffer (2004) and Dacanay (2007). Nevertheless, the result on the impact of equity to total assets ratio on efficiency seems to be in contrast to the results of study by Mester (1993), Mester (1996), Dietsch and Lozano-Vivas (2000) and Kablan (2007). Based on the results obtained, it is suggested that managers should consider the used of debt in financing their operations in order to increase bank efficiency level. Besides that, the results also found that the return on assets is positively related to profit efficiency. This result is consistent with Berger et al. (1993), Mester (1993), Maudos et al. (2002) and Hassan (2005). The result is also consistent with the theory which states that a positive relationship between return on assets with bank efficiency should exist as more efficient banks would exhibit greater profit earnings (Mester, 1993). This served as an indicator to the bank management that banks can increase their efficiency by efficiently utilising assets of banks. References Aigner, D., Lovell, C. and Schmidt, P. (1977) Formulation and estimation of stochastic frontier production function models, Journal of Econometrics, Vol. 6, pp Akhigbe, A. and McNully, J.E. (2003) The profit efficiency of small US commercial banks, Journal of Banking and Finance, Vol. 27, pp Altunbas, Y., Carbo, S., Gardener, E.P.M. and Molyneux, P. (2007) Examining the relationship between capital, risk and efficiency in European banking, European Financial Management, Vol. 13, No. 1, pp Battese, G.E. and Corra, G.S. (1977) Estimation of a production frontier model: with application to the pastoral zone of Eastern Australia, Australian Journal of Agricultural Economics, Vol. 21, pp Berger, A.N. (1995) The relationship between capital and earnings in banking, Journal of Money, Credit, and Banking, Vol. 27, pp

14 194 S-G. Chan and M.Z.A. Karim Berger, A.N. and DeYoung, R. (1997) Problem loans and cost efficiency in commercial banks, Journal of Banking and Finance, Vol. 21, pp Berger, A.N., Hancock. D. and Humphrey, D.B. (1993) Bank efficiency derived from the profit function, Journal of Banking and Finance, Vol. 17, pp Berger, A.N. and Humphrey, D.B. (1992) Measurement and efficiency issues in commercial banking, in Z. Griliches (Ed.), Output Measurement in the Service Sectors. National Bureau of Economic Research, Studies in Income and Wealth, Vol. 56, Chicago: University of Chicago Press, pp Berger, A.N. and Mester, L.J. (1997) Inside the black box: what explains differences in the efficiencies of financial institutions, Journal of Banking and Finance, Vol. 21, pp Bos, J.W.B. and Kool, C.J.M. (2006) Bank efficiency: the role of bank strategy and local market conditions, Journal of Banking and Finance, Vol. 30, pp Carvallo, O. and Kasman, A. (2005) Cost efficiency in the Latin American and Caribbean banking systems, Journal of International Financial Markets, Institutions and Money, Vol. 15, pp Casu, B. and Girardone, C. (2004) Large banks efficiency in the single European market, The Service Industries Journal, Vol. 24, pp Chang, T.C. and Chiu, Y.H. (2006) Affecting factors on risk-adjusted efficiency in Taiwan s banking industry, Contemporary Economic Policy, Vol. 24, pp Dacanay, S.J.O. (2007) Profit and cost efficiency of Philippine commercial banks under periods of liberalization, crisis, and consolidation, The Business Review, Vol. 7, pp DeYoung, R., Hunter, W.C. and Udell, G. (2004) The past, present and probable future for community banks, Journal of Financial Services Research, Vol. 25, pp Dietsch, M. and Lozano-Vivas, A. (2000) How the environment determines banking efficiency: a comparison between French and Spanish industries, Journal of Banking and Finance, Vol. 24, pp Fan, L. and Shaffer, S. (2004) Efficiency versus risk in large domestic US banks, Managerial Finance, Vol. 30, pp Fries, S. and Taci, A. (2005) Cost efficiency of banks in transition: evidence from 289 banks in 15 post-communist countries, Journal of Banking and Finance, Vol. 29, pp Gallant, A.R. (1981) On the bias in flexible functional forms and an essentially unbiased form: the flexible form, Journal of Econometrics, Vol. 15, pp Gallant, A.R. (1982) Unbiased determination of production technologies, Journal of Econometrics, Vol. 20, pp Girardone, C., Molyneux, P. and Gardener, E.P.M. (2004) Analysing the determinants of bank efficiency: the case of Italian banks, Applied Economics, Vol. 36, pp Greene, W.H. (1990) A gamma-distributed stochastic frontier model, Journal of Econometrics, Vol. 46, pp Hassan, M.K. (2005) The cost, profit and x-efficiency of Islamic banks, Paper presented at 12th Annual Conference of Economic Research Forum, Egypt, pp Humphrey, D.B. and Pulley, L.B. (1997) Banks responses to deregulation: profits, technology, and efficiency, Journal of Money, Credit, and Banking, Vol. 29, pp International Monetary Fund (IMF) (2007) Regional economic outlook: Asia and Pacific October 2007, World Economic and Financial Survey, Washington, DC. Jagtiani, J. and Khanthavit, A. (1996) Scale and scope economies at large banks: including offbalance sheet products and regulatory effects ( ), Journal of Banking and Finance, Vol. 20, pp Kablan, S. (2007) Measuring bank efficiency in developing countries: the case of WAEMU (West African Economic Monetary Union, Paper presented in the African Economic Conference: Opportunities and Challenges of Development for Africa in the Global Arena, Economic Commission for Africa, Ethiopia

15 Bank efficiency, profitability and equity capital 195 Kahane, Y. (1977) Capital adequacy and the regulation of financial intermediaries, Journal of Banking and Finance, Vol. 1, pp Karim, M.Z.A. (2001) Comparative bank efficiency across select ASEAN countries, ASEAN Economic Bulletin, Vol. 18, No. 3, pp Koehn, M. and Santomero, A. (1980) Regulation of bank capital and portfolio risk, Journal of Finance, Vol. 35, pp Laeven, L. and Majnoni, G. (2003) Loan loss provisioning and economic slowdowns: too much, too late?, Journal of Financial Intermediation, Vol. 12, pp Maudos, J. and Pastor, J.M. (2001) Cost and profit efficiency in banking: an international comparison of Europe, Japan and the USA, Applied Economics Letters, Vol. 8, pp Maudos, J., Pastor, J.M., Perez, F. and Quesada, J. (2002) Cost and profit efficiency in European banks, Journal of International Financial Markets, Institutions and Money, Vol. 12, pp Meeusen, W. and van den Broeck, J. (1977) Efficiency estimation from Cobb-Douglas production functions with composed error, International Economic Review, Vol. 18, pp Mester, L.J. (1993) Efficiency of banks in the Third Federal Reserve District, Center for Financial Institutions Working Papers 94 13, Wharton School Center for Financial Institutions, University of Pennsylvania. Mester, L.J. (1996) A study of bank efficiency taking into account risk-preferences, Journal of Banking and Finance, Vol. 20, pp Park, K.H. and Weber, W.L. (2006) Profitability of Korean banks: test of market structure versus efficient structure, Journal of Economics and Business, Vol. 58, pp Perera, S., Skully, M. and Wickramanayake, J. (2007) Cost efficiency in South Asian banking: the impact of bank size, state ownership and stock exchange listings, International Review of Finance, Vol. 7, No. 1, pp Rogers, K.E. (1998) Nontraditional activities and the efficiency of US commercial banks, Reserve Bulletin, Vol. 22, pp