The Impact of Financial Freedom on Bank Efficiency: Evidence from A Two-Stage Double-Bootstrap Data Envelopment Analysis

Abstract

The objective of this study is to investigate the impact of financial liberalization on the efficiency of banks. In the study, the effects of administrative and institutional regulations on efficiency are also presented. The analysis consists of two stages. In the first stage, the efficiency scores of 26 deposit banks operating in the Turkish banking industry between 2005 and 2017 are estimated by Data Envelopment Analysis. In the second stage, the impact of the financial liberalization on a bank’s efficiency is estimated by the bootstrap method of Simar and Wilson (2007). In addition, the estimated coefficients are subjected to robustness analysis within the framework of the fractional logit estimator. The results confirm that there is a positive correlation between the financial liberalization index, which is one of the indicators of economic freedom, and the efficiency of the banks. Accordingly, financial liberalization policies can contribute to the optimal allocation of financial resources through efficiency channel, while making it possible for banks to maximize their profit. In addition, a general finding has been obtained that the efficiency in the Turkish Banking sector can be increased through institutional regulations and the associated costs could be reduced.