Bank branch performance and cost efficiency: a stochastic frontier panel data approach

Abstract

This paper analyses the relationship between performance assessment methods used by banks to evaluate their branches and the corresponding time-varying cost efficiency. To do this, we employ a panel data framework and consider bank branches' latent heterogeneity, which might arise from unobserved non-systematic management problems. Our analysis is based on monthly data obtained from the branches of a large commercial bank operating in Spain during the period 2013–2014. The results indicate that there is unobserved heterogeneity and time-varying cost efficiency in the bank branches, and that inefficiency scores are low, at 1–15%. Time-varying cost efficiencies are positively associated with measures of the volume of business (the productivity based on value achieved by the branch) and negatively associated with the surface area of the branch and with time. However, no relation was found regarding balance sheet and profit and loss statements (i.e., negative deviations from gross income targets).