The determinants of cost efficiency in cooperative financial institutions: Australian evidence

Previous studies of efficiency in cooperative financial institutions assume subsidies to be a normal part of business operations. Using a sample of Australian credit unions (CUs) this paper shows that ignoring subsidies biases estimates of cost efficiency and efficiency rankings. Time varying cost e...

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Bibliographic Details
Published in:Journal of banking & finance 2001-05, Vol.25 (5), p.941-964
Main Author: Esho, Neil
Format: Article
Language:English
Subjects:
Australia
Banking
Business
Cooperation
Costs
Credit unions
Efficiency
Finance
Financial economics
Financial institutions
Interest rates
Stochastic models
Studies
Subsidies
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Summary:Previous studies of efficiency in cooperative financial institutions assume subsidies to be a normal part of business operations. Using a sample of Australian credit unions (CUs) this paper shows that ignoring subsidies biases estimates of cost efficiency and efficiency rankings. Time varying cost efficiency is estimated using stochastic frontier and generalised WITHIN approaches and compared with the distribution free (DF) approach assuming constant efficiency. Despite significant industry rationalisation, average efficiency shows little improvement over the period 1985–1993, however efficiency rankings change considerably. Second stage regressions suggest bond type, size, age, average deposit size and interest rate spreads are significant determinants of relative cost efficiency.
ISSN:0378-4266
1872-6372
DOI:10.1016/S0378-4266(00)00104-7