Efficiency in Banking: Empirical Evidence from the Savings ... - Ivie

Hence, the FF is a semi-nonparametric approach used to tackle the problem arising
when the true functional form of the relationship is unknown. As noted above, the
methodology was first proposed by Gallant (1981, 1982), and later discussed by Elbadawi,
Gallant and Souza (1983), Chalfant and Gallant (1985), Eastwood and Gallant (1991),
Gallant and Souza (1991). It has been applied to the analysis of bank cost efficiency by
Spong et al. (1995), Mitchell and Onvural (1996) and Berger et al. (1997). Vennet (1998)
estimates both the translog and FF cost function in his study of European universal and
specialist banks but reports only the translog estimates because the results are similar.
To calculate the inefficiency measures, the FF form, including a standard translog
and all first, second and third-order trigonometric terms, as well as a two-component error
structure is estimated using a maximum likelihood procedure. This is shown as:
3
∑[
a
i= 1
i
∑
1 ⎡
⎢
2 ⎣
cos (
3
i= 1
3
∑
j= 1
3
∑
i= 1
3
∑
i= 1
z
) +
i
ln
3
∑
j= 1
3
∑
m= 1
b
δ
ρ
3
∑[
a
k≥
j,
k≠i
sin (
i
TC
ij
= α0+
im
lnQ
lnQ
z
ijk
i
)
i
3
∑
lnQ +
i
3
] +∑
cos (
i= 1
i= 1
z
αilnQ+
j
lnPm+
i
+
3
∑
l= 1
3
∑
i= 1
∑
3
∑[
a
j=
1
z
j
+
i
∑
3
3
l= 1
m= 1
γ
β
ψ T lnQ +
z
i
k
ij
) +
lm
l
cos (
b
lnPl+
t1T
+
lnP
i
ijk
z
l
∑
+
sin (
lnP
3
l= 1
i
θ lT
lnP l+
z
z
i
) +
j
m
+
+ t11T
z
b
j
ij
+
2
⎤
⎥+
⎦
sin (
z
k
)
z
i
+
] +
(4)
where
lnTC = the natural logarithm of total costs (Operating and Financial cost);
lnQ i = the natural logarithm of bank outputs (i.e. loans, securities, off-balance sheet
items);
ε
z
j
)
] +
12