Determinants of bank efficiency in the Philippines: Evidence from a non-parametric methodology

• Main Author: Enriquez, Christian Jo Cruz
• Format: text
• Language: English
• Published: Animo Repository 2021
• Subjects: Banks and banking > Philippines; Economics
• Online Access: https://animorepository.dlsu.edu.ph/etdm_econ/4; https://animorepository.dlsu.edu.ph/cgi/viewcontent.cgi?article=1003&context=etdm_econ
• Institution: De La Salle University

The reforms that ran parallel with a rapid expansion in the Philippine banking industry provide a rationale for re-examining how the banks’ technical efficiency may have changed over the course of the period. Technical efficiency pertains to the capability of banks to produce maximum outputs, defined in terms of earnings assets such as loans and equity investment, whilst using inputs such as deposits, fixed assets and capital. This paper analyzes the relationship between bank variables, technical efficiency and environmental factors in a post-reform setting by applying 2-stage Data Envelopment Analysis (DEA) on most recent quarterly bank data, post-implementation of the bank reforms in capital and credit between 2015 to 2020. The estimates show that size is a main determinant of bank technical efficiency implying benefits in economies of scale. The ambiguous relationship between efficiency and NPL suggests that while a manageable increase in bad assets may be a natural outcome of greater intermediation as banks take on more risk, good risk management is necessary for sustainable operations. Although better capitalization inarguably raises resilience of the banks, the observed negative relationship raises the question as to timing of capital reform. The increase in regulatory capital may have come at a time when the demand for credit cannot keep pace with additional intermediation funds in the banking system, thus the average decline in bank efficiency. As to macroeconomic factors, inflation showed strong positive correlation with bank efficiency, while the link with real sector productivity (GDP) is less pronounced, and of the opposite sign. This emphasizes the critical role played by central banks in carrying out its mandate of price stability, in fostering efficiency in the banking sector.