Institutions and Bank Performance: A Stochastic Frontier Analysis

Abstract

This paper examines whether institutional differences between countries impact upon the efficient operation of commercial banks. We hypothesize that well developed institutions may affect the adoption of the technology used by banks, and the efficient use of the technology in place. By applying a stochastic frontier analysis on a panel of more than 2000 banks for 110 countries over 7 years we show that banks operating in countries with better institutions apply more cost reducing technologies, and are able to use the technologies in place more efficiently. Overall, the results underpin the importance of well-developed institutions for an efficient operation of commercial banks.

Keywords: Institutions, Efficiency, Stochastic Frontier Analysis, Banks

JEL Classification: G21, G30, K4