Heterogeneity and time-varying efficiency in the Ecuadorian banking sector. An output distance stochastic frontier approach

Abstract

This paper estimates the efficiency of Ecuadorian commercial banks from 2007 to 2017, considering multiple inputs and outputs, several factors explaining inefficiency, technological unobserved heterogeneity, and time-varying efficiency. To do this, we used an output distance function stochastic frontier model in a Bayesian framework and considered the profitability approach. In general, the results show evidence of unobserved cross-bank heterogeneity and time-varying inefficiencies, the latter of which presented scores which were high and stable over time. One factor that significantly explains inefficiency is foreign ownership, however internal factors such operating profitability and Central Bank policy reserve requirements did not. Finally, estimated returns to scale show bimodality indicating the existence of two bank groups associated with decreasing and constant returns to scale.