Using accounting data to measure efficiency in banking: an application to Portugal

Abstract

This paper uses accounting data to provide estimates of productive efficiency in Portuguese banking. A model of the production process of the banking firm consistent with the characteristics of this kind of data is presented. This framework differs from existing literature on the explicit inclusion of the balance sheet constraint on the cost minimization problem, being concluded that in such context deposits should be handled as an output. Results show clear evidence for the existence of economies of scale for the smaller banks and economies of scope between deposits and loans were found for all but the largest banks. A discussion on the determinants of individual inefficiency scores is also presented, being concluded that they are affected by factors such as size, type of ownership and age. A positive trend on efficiency was also found.