Efficiency of labour use in the Swedish banking industry: a stochastic frontier approach

The purpose of this paper is to analyse the impact of the deregulation of the Swedish banking industry in the mid-1980s, and the consequent banking crisis, on productive efficiency and productivity growth in the industry. An unbalanced panel of Swedish banks is studied over the period, 1984 to 1995. A total of 1275 observations are analysed for 156 banks that were observed for between two and twelve years. We adopt a translog stochastic frontier model to estimate the labour-use requirements in terms of the variables, loans, deposits, guarantees, number of branches and total inventories, together with the year of observation. The inefficiency effects in the labour-use frontier are modelled in terms of the number of branches, total inventories, the type of bank and year of observation. The technical inefficiencies of labour use of Swedish banks were found to be significant, with mean inefficiencies per year estimated to be between about 8 and 15 per cent over the years of study. However, the confidence interval predictions for these inefficiencies were found to be quite wide.