Cost efficiency performance of Indonesian banks over the recovery period: A stochastic frontier analysis

Abstract

This study examines cost efficiency of Indonesian commercial banks during the period 2002–2010. The period testifies a recovery period post-Asian Financial Crisis 1997–1998 and post-bank restructuring and recapitalisation programme of 1997–2001. Stochastic frontier analysis is employed to estimate bank cost efficiency with the Battese-Coelli 1992 (BC92) and standard-pooled methods with the two-stage analysis. TOBIT regression is also used to reveal the determinants of Indonesian banks’ cost efficiency over the period.The findings of the study show that the average cost efficiency of Indonesian banks were likely to incline over the study period. Among all models examined, it is proven that bank size, profitability, capital adequacy, loans to deposit, and credit risk management are those of internal variables affecting the Indonesian bank cost efficiency over the study period. Meanwhile, all macroeconomic indicators included in the models are also significant in affecting Indonesian bank cost efficiency during the period.

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