Working Paper

A Novel MIMIC-Style Model of European Bank Technical Efficiency and Productivity Growth


Abstract: Using Bayesian Monte Carlo methods, we augment a stochastic distance function measure of bank efficiency and productivity growth with indicators of capitalization, return and risk. Our novel Multiple Indicator-Multiple Cause (MIMIC) style model generates more precise estimates of policy relevant parameters such as returns to scale, technical inefficiency and productivity growth. We find considerable variation in the performance of EU-15 banks over the period 2008 to 2015. For the vast majority of banks, productivity growth – the sum of efficiency and technical changes – is negative, implying that the industry would benefit from innovation. We show that greater technical efficiency is associated with higher profitability, higher capital, a lower probability of default and lower return volatility.

Keywords: productivity growth; technical efficiency; Multiple Indicators-Multiple Causes (MIMIC); EU banks;

JEL Classification: G21; D24; C11; C51;

https://doi.org/10.24149/wp2012

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2020-05-19

Number: 2012

Pages: 36