The effect of bank m&As on efficiency: the portuguese experience victor Mendes

Annex 4: Cost-inefficiency indexes – SFA method, with endogenous inefficiency effects

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Annex 4: Cost-inefficiency indexes – SFA method, with endogenous inefficiency effects

Bank	1990	1991	1992	1993	1994	1995	1996	1997	Average
1	0.005	0.006	0.006	0.005	0.005	0.005	0.005	0.005	0.005
2	0.302	0.302	0.295	0.268	0.008	0.007	0.259	0.115	0.195
3	0.005	0.005	0.005	0.005	0.005	0.005	0.005	0.005	0.005
4	0.006	0.006	0.005	0.005	0.005	0.005	0.005	0.005	0.005
5	0.155	0.298	0.151	0.134	0.145	0.122	0.117	0.111	0.154
6	0.199	0.005	0.207	0.005	0.006	0.181	0.174	0.005	0.098
7	0.286	0.284	0.285	0.273	0.278	0.273	0.271	0.107	0.257
8	0.189	0.188	0.187	0.181	0.179	0.177	0.170	0.167	0.180
9		0.033	0.033	0.029	0.030	0.029			0.031
10	0.198	0.194	0.190	0.185	0.055	0.052	0.048	0.045	0.121
11	0.304	0.296	0.137	0.128	0.131	0.127	0.122	0.118	0.170
12					0.030	0.031	0.029	0.027	0.029
13	0.005	0.005	0.005	0.186	0.187	0.005	0.005	0.005	0.050
14	0.299	0.299	0.131	0.124	0.127	0.124	0.122	0.115	0.168
15	0.321	0.166	0.166	0.154	0.152	0.127	0.113	0.121	0.165
16	0.203	0.190	0.060	0.057	0.060	0.058	0.052	0.047	0.091
17					0.028	0.026	0.029	0.022	0.026
18			0.133	0.130	0.127	0.127	0.123	0.122	0.127
19					0.134	0.126			0.130
20	0.005	0.005	0.005	0.005	0.005	0.005	0.005	0.005	0.005
21	0.147	0.149	0.152	0.144	0.145	0.141	0.139	0.134	0.144
22	0.307	0.155	0.159	0.150	0.133	0.127	0.122	0.117	0.159
23	0.219	0.207	0.063	0.063	0.055	0.047	0.042	0.044	0.093
24				0.137	0.135	0.178	0.126	0.120	0.139
25	0.302	0.300	0.296	0.283	0.181	0.118	0.114	0.109	0.213
26					0.005	0.005	0.005	0.004	0.005
27	0.304	0.009	0.282	0.132	0.133	0.126	0.123	0.118	0.153
28	0.006	0.006	0.006	0.005	0.005	0.194	0.005	0.005	0.029
29		0.006	0.005	0.005	0.005	0.005	0.057	0.051	0.019
30	0.165	0.160	0.157	0.147	0.149	0.147	0.140	0.135	0.150
31	0.006	0.006	0.005						0.006
32					0.034	0.029	0.026	0.023	0.028
33	0.006	0.006	0.006	0.005	0.006	0.005	0.005	0.005	0.005
34	0.005	0.006	0.005	0.005	0.005	0.004	0.005	0.005	0.005
35	0.301	0.295	0.293	0.124	0.129	0.126	0.121	0.114	0.188
36						0.023	0.022	0.021	0.022
37		0.004	0.004	0.004	0.005	0.004	0.004	0.004	0.004
38						0.114	0.113	0.107	0.111
39					0.132	0.143	0.113	0.134	0.130
40					0.141	0.129	0.126	0.111	0.127
41	0.006	0.005	0.005	0.005	0.005	0.005	0.005	0.005	0.005
42						0.004	0.004	0.004	0.004
43		0.152	0.147	0.138	0.137	0.027	0.025	0.023	0.093
44	0.197	0.005	0.186	0.177	0.182	0.178	0.167	0.155	0.156
45	0.298	0.297	0.148	0.118	0.125	0.121	0.115	0.108	0.166
46						0.004	0.004	0.004	0.004
Average	0.164	0.123	0.115	0.103	0.088	0.080	0.079	0.065	0.098

1 See, for example, Rebelo and Mendes (1999), Mendes and Rebelo (1999).

2 Along with the getting big argument, reputation-building incentives could be thought of as possible explanations for mergers. If greater ability is necessary to (successfully) run a bigger bank, then engaging in merger activities should benefit manager reputation as well as executive compensation. On the other hand, if market agents perceive large banks to be too big to fail, then incentives to increase size may exist.

3 We assume that u follows the half-normal distribution.

4 Banco Hispano is not included.

5 But not necessarily more profit-efficient.

6 All but three small private foreign banks were nationalized following the April 25, 1974, revolution. At that time these three small banks had a combined market share of 2% approximately.

7 The reason is that whenever we consolidate interbank operations the result is smaller than the sum of parts.

8 The rationalization of the branch network, with the closure of overlapping branches is another possible source of increased efficiency. Hence, we can interpret our results as a lowerbound to efficiency effects of these mergers.

9 According to Kwast (1999), in the USA 75% of households’ checking, savings, credit line, and other services are obtained at financial institutions located within 25 km of their workplace or home. Survey data also shows that 98% of households and 92% of small businesses use local banks.

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