Efficiency and Foreign Ownership in Banking: An International Comparison

This paper estimates cost and profit efficiency for Latin American and the Caribbean banking sectors. This study also conducts a comparative analysis of the performance of foreign and domestic banks operating in these counties. Using a model proposed by Battese and Coelli (1995), a common cost and profit frontiers with country-specific environmental variables have been estimated for a panel of 427 banking firms from sixteen countries. The empirical analysis reveals the importance of the environmental variables in explaining the efficiency differences among countries. The results show that profit efficiency levels are well below those corresponding to cost efficiency, implying that the most important inefficiency is on the revenue side. The results further indicate that on average foreign banks are more efficient than domestic banks.