Cost Efficiency of the Banking Sector in Vietnam: A Bayesian Stochastic Frontier Approach with Regularity Constraints

Abstract

This paper investigates the cost efficiency of the Vietnamese banking industry. To obtain an appropriate estimate of cost efficiency, monotonicity and concavity constraints are incorporated in the estimation of the cost frontier using the Bayesian approach. Overall, the level of cost efficiency of Vietnam's banking sector is relatively high, around 87 percent. The findings reveal minor and insignificant differences in the cost efficiency of different groups of banks classified by ownership. Furthermore, throughout the estimation period, the industry faced a slight decrease in cost efficiency. This could be explained by increases in the costs of managing diverse activities, the enlargement of branch networks and the upgrading of the banking technology platform.

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