Profit and cost efficiency in the Italian banking industry (2006-2011)

Abstract

This study evaluates the cost and the profit efficiency of Italian banking sector over the period 2006-2011. Translog stochastic frontiers are used for this purpose. Following the intermediation approach, efficiency scores are computed from estimating a model with three inputs and three outputs. Results indicate that Italian banks perform well, given that the average levels of cost and profit efficiency are both around 90% and they are quite stable over time. However, there is high heterogeneity in results. Differences have been found when banks are classified by size (efficiency tends to decrease with size), legal type (cooperatives perform better than others) and area (the best performers are in the North East of the country).