I. Introduction
Research on bank performance and efficiency
has advanced greatly in the past three decades.
The large number of studies on the subject worldwide
is largely justified by the importance of a
properly functioning financial system for the
economy in general. Specifically, the financial
system's role in allocating resources to productive
sectors where liquidity is relatively scarce,
its function as the engine of the payments system,
and also the role it plays in promoting long-term
growth are major factors motivating research
into the efficiency of its productive structure.
In Colombia, too, bank efficiency has been the
subject of research studies, though at a lesser
extent than in developed countries. Between
1983 and 2004 barely a dozen studies were carried
out on the financial system's cost structure.
The present review will focus on a number of
studies that have contributed to public debate
on bank efficiency in Colombia.
When speaking of bank efficiency a distinction
has to be made between two concepts: output
efficiency and input efficiency. Output efficiency
has to do with the likelihood that the banking
firm is producing either optimal output levels
(scale efficiency), or an optimal combination
of several outputs (scope efficiency), or both.
The level of inefficiency is measured by comparing
the costs of the current output level with those
of an optimal output level (the one that minimizes
average costs).
On the other hand, input efficiency is related
to the firm's capacity for using its inputs
efficiently to produce a given quantity of output.
Inefficiency in the use of inputs refers to:
(1) the likelihood of using more inputs than
necessary for producing a given level of output
(technical inefficiency), and (2) the likelihood
of using a wrong combination of inputs in such
production (allocative inefficiency). These
two types of efficiency in the use of inputs
are called economic- or X-efficiency. X-efficiency
is most commonly measured by estimating an efficiency
frontier (a minimum cost function, for example)
and for comparing how far each firm deviates
from such "ideal behavior."
The Colombian studies can be fitted into two
large groups on both a chronological and a topical
basis. The first group consists of papers published
between 1983 and 1996 on measuring economies
of scale in Colombia's financial sector. They
include, notably, studies by Bernal and Herrera
(1983), Suescún (1987) and Ferrufino (1991).
A study by Suescún and Misas (1996) marks the
transition between the studies on scale efficiency
and those on economic efficiency or X-efficiency
(also called input efficiency). Since 1996 to
present, research on Colombian banks' efficiency
has focused almost exclusively on seeking measurements
of economic efficiency.
This may have been caused by the country's financial
liberalization in the 1990s which substantially
reduced the entry barriers that created distortions
in the sector in terms of sunk costs and lack
of competition. It thus became more interesting
to study the banks' output structure in terms
of their ability to use inputs in the best possible
way, rather than simply reviewing the industry's
position against its average cost curve. The
studies of Castro (2001), Badel (2002), Janna
(2003) and Estrada and Osorio (2004) make up
the second group. This brief review is organized
as follows: in sections II and III I discuss
literature related to scale economies and X-efficiency
respectively (groups 1 and 2 defined above).
In section IV I take a look at the time evolution
of bank efficiency estimations for the Colombian
case. Section V deals with studies of bank efficiency
determinants. Other types of efficiency studied
for the Colombian financial sector are included
in section VI, and section VII shows some final
remarks.
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