Bank efficiency ratios in Latin America

Abstract

Previous literature has shown a strong association between the financial sector and economic growth, but theory predicts ambiguous associations between banking efficiency and size or market share. The relationships among efficiency ratios, absolute scale, and rank category are explored for a relevant subset of banks in each of four Latin American countries. The results indicate a robust association between efficiency and absolute scale but not between efficiency and relative scale, which suggests that the observed efficiency of larger banks is not an artefact of market power among dominant banks.

Notes

A similar pattern is evident in the USA, according to data from the FDIC: as of mid-year 2004, the average efficiency ratio of FDIC-insured US depository institutions was 58.54%, and was 55% to 58% for banks larger than $1 billion, 64% for banks with assets between $100 million and $1 billion, and 70% for banks smaller than $100 million.