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THE EFFECT OF LIBERALIZATION ON BANKING EFFICIENCY: EVIDENCE FROM MEXICO

Violeta Díaz

New Mexico State University, U.S.A.

 

ABSTRACT

This study investigates the effect of foreign ownership on cost efficiencies of the largest banks in Mexico during 2000-2009. Results from Stochastic Frontier Analysis (SFA) show that on average cost efficiency for the whole sample is 73 percent. By dividing the sample into two time periods, we find that cost efficiencies increased significantly from 2000 to 2009. Cost efficiency improved from 72% in 2000 to 82% in 2009. Fixed and random effects models controlling for size, ownership, performance, and loan portfolio provide compelling evidence that foreign banks are more cost efficient than domestic banks. These findings support previous evidence on the efficiency levels of foreign banks in developing countries. On one hand, the amount of government loans, the percentage of non-performing loans to total loans, and the size of the banks have a negative effect on cost efficiency. On the other hand, the amount of consumer loans has a positive effect on the efficiency of banks. These results imply than among the largest banks, size has a negative influence on efficiency.

Key words: Banking efficiency, foreign ownership, liberalization, Mexico

JEL Codes: F34, G01, G2