Estimating Philippine Bank Efficiencies Using Frontier Analysis

Abstract

Frontier method is used to estimate the ‘best-performing frontier’ to compute for the relative efficiencies of different bank groups (e.g., universal, commercial, thrift, rural and cooperative) in the Philippines over the period 1999-2009. As bank groups are used as decision-making units (DMUs), window analysis is utilized considering the few number of DMUs per period. Results from Data Envelopment Analysis (DEA), a non-parametric technique, indicate a generally declining trend in technical efficiency. Results also do not seem to fully support the hypothesis that bigger banks on the average are more efficient than smaller banks. Decomposing total factor productivity using the DEA-Malmquist TFP Index allows identification of sources of productivity and direction of its changes. Results indicate that Philippine banks have undergone technological progress but this did not necessarily increase total factor productivity because of the decline in technical efficiencies (TEs). These findings, however, cannot be conclusive because differences in efficiencies and changes in total factor productivity are not supported statistically. The researcher suggests the use of individual banks’ data for each of the bank groups to possibly validate these results.