The Efficiency of the Italian Banking System over 2006-2011. An Application of the Stochastic Frontier Approach

The objective of this paper is to analyse the efficiency of the Italian Banking System over the period 2006-2011. The Stochastic Frontier Approach (SFA) is applied to a panel of 700 Italian Banks. The analysis is based on the joint estimation of a cost function and an efficiency equation (Battese and Coelli, 1995). Following the intermediation approach (Sealey and Lindley, 1977), bank outputs are comprised of loans, the non-interest income and securities. Besides the controlling variables, the efficiency equation includes an indicator of credit quality. The main results are fourfold. First, cost efficiency does not show regular dynamics over time and ranges from 0.86, observed in 2008, to 0.92 in 2011. Secondly, it indicates that the cost efficiency of cooperative banks (CCB) is always higher than that observed for joint-stock companies (LTD) and Popolari banks. Third, the study suggests that cost efficiency tends to decrease as bank size increases. Finally, as regards the role of the determinants of banks efficiency («what makes a bank efficient»), we find that there are positive relationships between efficiency and credit quality, the solvency index, the industry concentration index and the FTSE.