Applying the New Metafrontier Directional Distance Function to Compare Banking Efficiencies in Central and Eastern European Countries

This paper establishes a new metafrontier directional technology distance function (MDDF) under a stochastic framework, rather than a deterministic setting like the one proposed by Battese et al. (2004). The new MDDF allows for calculating comparable technical efficiencies for banks under different...

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Bibliographic Details
Published in:	Economic modelling 2015-01, Vol.44, p.188-199
Main Authors:	Huang, Tai-Hsin, Chiang, Dien-Lin, Tsai, Chao-Min
Format:	Article
Language:	eng
Subjects:	Banking industry Banks Eastern Europe Efficiency environmental variables Evidence Financial services Innovation International comparisons Loans Managers metafrontier directional distance function Nonperforming loans Stochastic models Studies technical efficiencies Technology undesirable output
Online Access:	Get full text
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Summary:	This paper establishes a new metafrontier directional technology distance function (MDDF) under a stochastic framework, rather than a deterministic setting like the one proposed by Battese et al. (2004). The new MDDF allows for calculating comparable technical efficiencies for banks under different technologies relative to the potential technology available to the industry across nations. The inefficiency term of the new MDDF is further associated with relevant environmental variables of the form proposed by Battese and Coelli (1995). The new MDDF is then applied to examine and compare bank efficiencies of 17 Central and Eastern European countries. Non-performing loans (NPLs) are regarded as an undesirable, jointly produced with various loans, and the omission of them tends to underestimate technical inefficiency scores. Evidence is found that the estimated technology gap dominates technical efficiencies. Bank managers are suggested to swiftly adopt new financial innovations with an eye to shift the group frontier closer to the metafrontier. •We establishes a new metafrontier directional distance function (MDDF).•The stochastic frontier MDDF is further linked with environmental variables.•The new MDDF is used to examine bank efficiencies of 17 CEE countries.•Non-performing loans (NPLs) are regarded as an undesirable.•We find that the estimated technology gap dominates technical efficiencies.
ISSN:	0264-9993 1873-6122