The determinants of non-bank financial institution efficiency: A stochastic cost frontier approach

Abstract

A two-stage estimation procedure is employed to evaluate non-bank financial institution efficiency. In the first stage, maximum-likelihood estimates of an econometric cost function are obtained for a cross-section of one hundred and fifty Australian credit unions. The results indicate that a typical credit union’s costs in 1995 were only some seven percent above what could be considered efficient. The second stage uses limited dependent variable regression techniques to relate credit union efficiency scores to structural and institutional considerations. The results indicate that non-core commercial activities are not a significant influence on the level of cost inefficiency, though asset size, capital adequacy regulation, and branch and agency networks are. A primary influence on credit union efficiency would appear to be the industrial or community associational bond under which they were created, and to a lesser extent the state-based regulatory framework.