Catarina Figueira

Joseph Nellis

The Effects of Ownership on Bank Efficiency in Latin America

Keywords: Latin America, banking efficiency, ownership, performance JEL classification: G21, G32, N26 Latin America, banking efficiency, ownership, performance

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Literature Review and the Research Hypotheses

A number of studies have addressed the subject of efficiency in banking. Most have been country-level studies with many focusing on the US banking system. A number of these studies have emphasized the role played by better-quality management of resources in raising economic performance. For example, management of resources was found to be more important than scale and scope economies in determining bank performance by Berger (1993;also see Peristiani, 1996;Berger and Mester, 1997;[START_REF] Mukherjee | Productivity growth in large US Commercial Banks: the Initial Post-deregulation Experience[END_REF][START_REF] Barr | Evaluating the productive efficiency performance of US commercial banks[END_REF][START_REF] Akhigbe | The Profit Efficiency of Small US Commercial Banks[END_REF]. By contrast, there have been relatively fewer studies concerned with cross-country analyses of bank efficiency (Berger and Humphrey, 1997). Important exceptions are [START_REF] Allen | Operational efficiency in banking: An international comparison[END_REF], who tested for input and output inefficiencies in 15 countries, and Altunbas et al. (2001), who modelled costs using a sample of EU countries. More recently, [START_REF] Maudos | Cost and profit efficiency in European banks[END_REF] and Weill (2003) have also examined EU banking and cost and profit efficiency and Figueira et al. (2004) have compared the performance of Polish and UK banks.

In particular, there appear to have been very few studies of the performance of banks in Asia, Africa, Latin America and Central and Eastern Europe. While [START_REF] Claessens | Internationalization of financial services in Asia, World Bank working paper[END_REF] compared profitability in banking in Asia and [START_REF] Kwan | Operating performance of banks among Asian economies: An international and time series comparison[END_REF] studied unit costs in banks in seven Asian countries, the majority of papers have tended to be mainly descriptive -setting out the kinds of reforms introduced into banking but with (Peek and Rosengren, 2001;[START_REF] Juan-Ramón | A statistical analysis of banking performance in the Eastern Caribbean Currency Union in the 1990s[END_REF]. Where econometric modelling has been applied, the literature lacks a direct comparison between the banking systems in each country and the region as a whole [START_REF] Clarke | Foreign bank entry: Experience, implications for developing countries and agenda for further research[END_REF]Fuentes and Vergara, 2003;[START_REF] Gruben | Privatisation, competition and supercompetition in the Mexican commercial banking system[END_REF]Majnoni et al., 2003[START_REF] Mercan | The effect of scale and mode of ownership on the financial performance of the Turkish banking sector: results of a DEA-based analysis[END_REF]and Unite and Sullivan, 2003).

As a consequence of deregulation and market liberalization, debate has emerged as to whether the ownership structure of financial institutions plays a significant role in determining efficiency (Unite and Sullivan, 2003;Fuentes and Vergara, 2003;Clarke et al., 2003;[START_REF] Kocenda | Ownership and firm performance after large-scale privatisation[END_REF]Barth et al., 2003[START_REF] Koeva | The performance of Indian banks during financial liberalisation[END_REF]. A recent survey of a large number of privatization studies, covering a range of industries, concluded that privatization does lead to performance improvements [START_REF] Megginson | From state to market: a survey of empirical studies on privatisation[END_REF], but interestingly it reported only two studies specifically concerned with the banking sector. One by [START_REF] Laporta | Government Ownership of Banks[END_REF] reported a negative impact of state ownership on the development of financial systems and economic growth, especially in poor countries. The other by Verbrugge et al. (2000) is concerned mainly with banking in OECD countries and finds some benefits from privatization in terms of profitability, fee income, capital adequacy and leverage ratios. More recently. Berger et al. (2003) also claim that privatization did improve bank performance in Argentinean banks, when profit efficiency is considered; however, they also found a lack of cost improvement. The case for believing that private ownership is superior to state ownership in creating managerial incentives to raise productivity and lower costs of production is largely based on principal-agent theory and public choice theory (Clarke et al., 2005;Beck et al., 2003). Under principal-agent theory, managers face greater incentives to pursue profit maximization strategies than managers in the state sector because the private capital market is a superior monitor of management behaviour than government departments [START_REF] Hrovatin | The determinants of firm performance after ownership transformation in Slovenia[END_REF]Rowthorn and Chang, 1993;[START_REF] Boycko | A theory of privatisation[END_REF][START_REF] Ohlsson | Ownership and production costs: choosing between public production and contracting-out in the case of Swedish refuse collection[END_REF]. Public choice theory is complementary, suggesting government ministers and civil servants pursue vote and budget maximization goals that lead to waste and other inefficiencies (Shleifer and Vishny, 1994;Bartel andHarrison, 1999, Otchere andChan, 2003). Therefore, the first hypothesis tested by the research is:

Hypothesis 1: Banks in Latin America with private capital will operate more efficiently than banks mainly dependent on state capital. Some studies have suggested that where there is private capital but the state remains the dominant shareholder then efficiency incentives will be diminished (Otchere and Chan, 2003). However, Fama (1980) claims that managers of state-owned firms may wish to perform well, as a result of pressure from labour markets. Fama and Jensen (1983) also argue that managers' behaviour is greatly influenced by the fact that residual claimants in state-owned firms may threaten to withdraw their resources if 7 not satisfied with the firm's performance. Empirical studies which have reported a superior performance of state-owned banks over their private counterparts are Bhattacharyya et al. (1997) for commercial banks in India and Altunbas et al. (2001), who show that public German banks are slightly more cost and profit efficient than their private sector competitors. Perhaps the degree of state ownership is critical. Boardman and Vining (1989) reported in their study of 500 large non-US firms in 1983 that firms with mixed share ownership, state and private, performed less well than firms with complete private ownership and no better than those that were purely state owned. Thus full private ownership is needed to gain maximum efficiency 2 . This leads to the second research hypothesis:

Hypothesis 2: The performance of banks in Latin America will be affected by the degree of private investment.

Turning to foreign ownership versus domestic ownership, [START_REF] Crystal | Does foreign ownership contribute to sounder banks in emerging markets? The Latin American experience[END_REF] suggest that foreign ownership may contribute to the stability and development of developing countries' banking industries, although [START_REF] Clarke | Foreign bank entry: Experience, implications for developing countries and agenda for further research[END_REF] and Green et al. (2004) suggest that inefficiencies such as capital flight may also result. Sturm and 2 When considering the impact of privatisation on bank efficiency, [START_REF] Nakane | Bank Privatization and Productivity: Evidence for Brazil[END_REF] have also examined the different forms of privatisation. In their paper about bank privatisation and productivity in Brazil, they claim that straight privatisation appears to be a superior strategy to restructuring, followed by privatisation. institutions (which may be conducive to their better performance) and, even when foreign firms have access to better technology, spillover effects can lead domestic firms to catch up over time. By contrast, a number of studies of economic transformation in transition economies have found that the entry of foreign capital leads to major performance gains and that these can be more significant than the gains from privatizations involving simply domestic investors (Demirgüç-Kunt and Huizinga, 1999;[START_REF] Claessens | How does foreign entry affect domestic banking markets?[END_REF][START_REF] Kocenda | Ownership and firm performance after large-scale privatisation[END_REF]. The reasons for believing that foreign investment will lead to performance improvements lies in the superior management skills that foreign investors can introduce, along with more commercially-oriented goals and international capital sources. Moreover, from the examination of the Mexican banking system, [START_REF] Haber | Foreign banks and the Mexican Economy[END_REF] concluded that foreign banks tend to be more profitable than domestically-owned banks because they are able to charge higher service fees 3 . This leads to hypothesis 3.

3 [START_REF] Haber | Getting Privatization Wrong: The Mexican Banking System[END_REF] went further and claimed that the lack of foreign entry at the outset of privatisation of banks in Mexico "proved fatal for the banking system" (p. 28), because banks tended to be undercapitalized and Mexican bankers had, generally, little bank management expertise. However, once again we might expect the degree of ownership to matter. In this case, we might expect that the larger the foreign investment is in a bank in relation to its total capital, the greater will be the efficiency gains introduced. Where foreign investors hold minority shareholdings their views could be overruled by domestic shareholders. Therefore, a further hypothesis tested in the research is:

Hypothesis 4: The larger the share of foreign capital in the total capital of Latin American banks, the higher the resulting level of efficiency achieved.

It should be noted at the outset that we recognize that the research has limitations. In particular, given that we use cross-sectional analysis, we are unable to comment upon changes in performance over time. Unfortunately, sufficient consistent data on ownership do not exist to undertake a meaningful time series or panel analysis. 4 Also, our results could reflect sample bias. If the banks privatized were the best performers and therefore easiest to sell, and foreign investors cherry pick the best banks to invest in, then our results will be biased against a finding that state-owned and domestically- (2004) comment: efficiency becomes "a pre-condition rather than the result of foreign entry". These limitations need to be borne in mind when interpreting the results.

The Data and Performance Measures

We use data for 2001, the latest year for which we could obtain adequate detail on bank ownership in Latin America. The focus is on productive efficiency or costs of production. Data do not exist to discuss price-cost margins or service quality and therefore allocative efficiency. [START_REF] Bonin | Bank performance, efficiency and ownership in transition countries[END_REF], data obtained from Bankscope need to be dealt with carefully in order to ensure that a reliable sample has been constructed. Nevertheless, the database has been used extensively in research into banking internationally (Altunbas et al., 2001;Bikker and Haaf, 2002;[START_REF] Bonin | Bank performance, efficiency and ownership in transition countries[END_REF] and can produce useful results, provided data entry is undertaken with care.

In 2001, the total bank assets of the countries included in the study totalled approximately US$1,593 bn.. Our sample includes 40% of those assets, amounting to US$632 bn.. In terms of assets, therefore, it appears that our sample is sufficiently large to offer a fairly representative picture of performance in the Latin American banking sector as a whole, although not necessarily on relative performance in every country included. 13 of loan loss provisions and other provisions to total assets (P/TA). Finally, the ratio of equity to total capital (E/TA) was calculated to reflect the soundness of a bank's capitalization.

In addition to the use of performance ratios, performance was assessed using data envelopment analysis (DEA) and Stochastic Cost Frontier analysis (SCF). 7 DEA was first proposed by [START_REF] Charnes | Measuring the efficiency of decision making units[END_REF] on the assumption of constant returns to scale (CRS). [START_REF] Banker | Some models for estimating technical and scale inefficiencies in Data Envelopment Analysis[END_REF] extended the DEA model to allow for variable returns to scale (VRS). DEA uses a piece-wise-linear technology, which involves mathematical programming to establish the efficiency frontier. The efficiency of each unit (e.g. bank) is then established by measuring its position in relation to this frontier. Assume that there are M inputs and S outputs, for each of N banks. The efficiency estimates can be obtained by solving the following DEA linear programming problem:

Min , subject to 0 + Y y i 6
The method to calculate interest rate spread was adopted from Unite andSullivan (2003, p.2329) and involves calculating the difference between the ratio of interest income on loans to total loans and the ratio of interest expense on total deposits to total deposits. 7 A translog cost function analysis was also estimated using restricted Seemingly Unrelated Regressions, to allow for the influence of the cost share equations, derived from the Shepard's lemma, as where x i is the column vector for the i-th bank in the MxN input matrix, X, and y i is the column vector for the same bank in the SxN output matrix, Y. The difference between the CRS and VRS formulations resides in the convexity constraint. While in a CRS model a bank may be benchmarked against banks of different size, in a VRS model an inefficient bank is only benchmarked against banks of similar size.

= = + + = =
Therefore, weights will sum to a value that will usually differ from one.

The DEA approach has the advantage over a stochastic cost function analysis in that it does not require the prior specification of the functional form. This can be important where the functional form may be expected to vary, perhaps, for example, for banks across Latin America. However, DEA has the disadvantage of attributing all deviations from the efficiency frontier to production inefficiency. If any noise is present in the data due to measurement error, this will affect the position of the frontier and, as a consequence, the measurement of inefficiencies. DEA results are also easily biased by outliers in the data because they too can affect the position of the frontier.

analyses reported below. For reasons of space we do not report these results, but they can be obtained from the authors. A stochastic cost frontier (SCF) measure was also used because it does not have the same difficulties as DEA in terms of outliers and noise in the data (Battese and Coelli, 1995). This method uses statistical estimation in order to establish an efficiency frontier and, as a result, it provides the possibility to measure inefficiencies of firms which are away from the frontier. Using SCF, we consider that Total Costs are a function of the output (y), the price of inputs (w), the level of cost inefficiency in production (u) and a random part (v). The latter includes measurement error, random factors on the value of the output variables and the effects of unspecified input variables in the cost function (see Coelli et al, 1998). The terms u and v are considered to be multiplicatively separable from the other variables and the variables are expressed in logarithms. Therefore, the cost function can be represented as:

v u w y f C ln ln ) , ( ln + + =
.

(1)

Cost efficiency for an individual bank is the ratio between the minimum cost (C min ) necessary to achieve a desired level of output and the observed total cost (C) and can be written as:

F o r P e e r R e v i e w 16 Cost efficiency ( ) [ ] ( ) ( ) [ ] ( ) ( ) ( ) u u v w y f v w y f C C ln exp ln exp . ln exp . , exp ln exp . , exp min = = = (2)
The equation estimated in this paper is based on a flexible form of a translog cost function, as suggested by [START_REF] Casu | A comparative study of the cost efficiency of Italian bank conglomerates[END_REF] 8 and can be described as:

u v y w y y y w w w C i n n i in n m m n nm n n n i j j i ij i i i ln ln ) ln( ). ln( ) ln( ). ln( 2 1 ) ln( ) ln( ). ln( 2 1 ln ln 3 1 2 1 2 1 2 1 2 1 3 1 3 1 3 1 + + + + + + + = = = = = = = = = (3)
Restrictions of symmetry and linear homogeneity are imposed on the input prices.

The variables included in the model are total cost, which includes financial and operating costs (C), input prices which include price of labour (w 1 ), price of physical capital (w 2 ) and price of loanable funds (w 3 ), and quantity of outputs, described as loans (y 1 ) and other earning assets (y 2 ).

Unlike DEA, however, SCF modelling requires a priori determination of the functional form and the distribution of the error term. Given that we use data from 20 different Latin American countries (which may have different functional forms), we expected that this could cause some difficulty in the interpretation of the results derived.

The Empirical Results

The performance ratios Table 2 presents the financial and economic ratios with the results classified according to different levels of state and private as well as domestic and foreign ownership. To test hypotheses 1 and 2 above, relating to the effects of private ownership, we distinguished between banks which are totally privately owned; banks where the amount of assets owned by the state is less than 50% of the total assets; and banks where the majority of assets, at least 50%, are owned by the state. There were too few banks in each category for statistical analysis if we broke down state ownership into more discrete categories.

(Table 2 here.)

The Table also reports the results according to whether banks have some foreign capital and according to the degree of foreign investment, to test our research hypotheses 3 and 4. In the latter case, we distinguished between purely domesticallyowned banks; banks where the total amount of foreign-owned assets is less than 50% of the total; and banks with majority, at least 50%, foreign-ownership.

In Table 2 average Starting with the cost ratios, the results suggest that total costs to total output (TC/Y) are lower where there is some state ownership. The result is statistically significant for all levels of state ownership compared to private ownership. The results also confirm that there is no statistically significant differences in overheads to total assets (OV/TA) between privately-owned and state-owned banks, but personnel expenses to total costs (PE/TC) are higher in banks with majority state ownership.

The ratio of output to total assets (Y/TA) can help provide information on banks' revenues in the absence of data on bank pricing. As the results in Table 2 show, the ratio is higher in privately-owned banks than when banks are less than 50% state owned. In this case, these banks have an appreciably lower ratio than wholly privately-owned banks, suggesting that they are less effective in maximizing their revenues. However, there appear to be no statistically significant differences for this efficiency measure between privately-owned and majority state-owned firms.

Concerning the ratio of operational income to total assets (OI/TA) and all of our profit measures, differences between state and private banks are not statistically significant. Therefore, we cannot conclude that these banks have substantially when studying firms that may have differing production technologies. Regarding the asset quality ratio, namely loan loss provisions and other provisions to total assets (P/TA), this was found to be the same in privately-owned banks and in banks with over 50% state ownership, though there was some evidence of a slight statistically significant difference between private banks and banks with minority state ownership. Concerning the capital ratio, equity to total assets (E/TA), the results

in Table 2 suggest that banks which are minority state owned perform worse than banks which are either privately owned or have at least 50% state ownership and this difference is statistically significant. Therefore, the results suggest that banks which are minority state owned are under-capitalized compared with other banks. On balance, however, the performance ratio results in Table 2 suggest that comparing banks across Latin America, those that are privately owned do not perform obviously better than banks which have majority or minority state ownership.

Table 2 also reports the performance ratios in terms of the degree of foreign ownership of banks. In terms of cost ratios, domestically-owned banks tend to have lower costs as a percentage of output produced and this difference is statistically significant when we compare domestic banks with banks that are at least 50% foreign owned. However, the latter have a statistically significant lower personnel expenses to total assets than domestic banks. The ratio of overheads to total assets is similar Concerning the revenue ratios, namely output to total assets (Y/TA) and operational income to total assets (OI/TA), and the profitability ratios return on assets (ROA), interest rate spread (IRS) and net interest to total assets (NI/TA), and the capital ratio (E/TA), differences between domestically-owned banks and banks with foreign ownership are not statistically significant. Regarding the quality of assets ratio -loan loss provisions and other provisions to total assets (P/TA) -the ratio for domesticallyowned banks is slightly lower than for banks which are less than 50% foreign owned but not compared to banks that are majority foreign owned.

In summary, the performance ratios for domestically-owned versus foreign-owned banks are very similar, suggesting few differences in performance. It is possible, however, that our results for domestic and foreign ownership and state and private ownership mask important differences within each of the Latin American countries.

Perhaps private ownership and foreign ownership have more obvious effects in some of the economies. To test for this, we computed the same performance ratios for a number of the countries separately. This could not be done for all of the countries because, as shown in Table 1, for some countries we have limited data. The countries considered were Brazil, Chile, Colombia, Jamaica, Panama, Peru, Uruguay and Venezuela. The results obtained for each country were generally consistent with the pattern shown in 21 there was also no strong evidence from the performance ratios that privately-owned banks performed differently to state-owned banks or domestically-owned to foreignowned banks in terms of costs, revenue, profitability, asset quality and capital ratios 9 .

The DEA and SCF results

As a cross-check on the conclusions from the performance ratios, the same data base was used to assess performance using DEA and SCF techniques. Table 3 provides a summary of the results obtained using DEA. The input variables consisted of labour costs, non-labour costs (total operational costs excluding personnel expenses), capital costs and interest expenses (to reflect the costs of raising loanable funds). The capital costs were proxied by calculating interest charges on total assets, using the deposit rate as the appropriate interest charge. The deposit rate was available for all 20 countries unlike other interest rates that we might have used. 10 The result is admittedly a crude capital input indicator and may not accurately reflect the opportunity cost of bank financing. However, it was the best proxy we could achieve with the available data. Two output variables were considered, namely loans and other earning assets. The results for both CRS and VRS DEA models were calculated and although we only report the VRS results, the pattern of results was consistent 9 The detailed results can be obtained from the authors. 10 The interest rate data were extracted from the IMF's database, International Financial Statistics. foreign ownership are the same as those that were used when analyzing the performance ratios, above.

As the DEA results in Table 3 indicate, there is some suggestion that banks with some state ownership have a slightly higher average efficiency scores than banks which are entirely privately owned, but the differences are not statistically significant.

Turning to the results for domestically-owned versus foreign-owned banks, there is statistical evidence (at the 10% level of confidence) that domestically-owned banks are more efficient than banks under majority foreign ownership.

(Table 3 here.)

Table 3 also provides a summary of the results using SCF analysis. The results are broadly consistent with the set of DEA results, but with higher overall efficiency scores (something to be expected given that SCF, unlike DEA, distinguishes inefficiency in production from random error). Again, there is no statistical evidence that state banks underperform in relation to their private counterparts. Also, domestic banks appear to perform better than banks with minority foreign ownership and this result is significant at the 5% level. 11 The CRS results can be obtained from the authors. From an examination of the results within each of the eight countries, we can conclude that there are no significant differences between banks which are majority state-owned and privately-owned banks. This conclusion is valid across all countries for which the comparison is possible 14 . Also, at the individual country level, domestically-owned banks seem to be more cost efficient than banks with at least 50% foreign ownership in Chile and Colombia.

Concerning bank performance differences across countries, banks in Chile, Jamaica and Uruguay tend to exhibit statistically different cost efficiency scores from (Table 4 here.)

The overall conclusion from the DEA analysis seems to be that at the aggregate, Latin American, level there are few statistically significant input-output performance differences across different ownership forms, but that at the individual country level some differences arise. This suggests that aggregating regional data conceals national variations. In order to investigate national effects further, the DEA efficiency scores were next regressed on a range of bank-specific and country-level environmental variables. Bank-specific variables were chosen to reflect the ownership structure, bank size and whether the bank is a specialized government credit institution. Beyond country dummies, country-level environmental variables were also used to indicate the size and strength of a country's financial system (number of banks, the total amount of total assets in the banking system and the ratio of bank assets to national GDP); the level of competition in banking (the three and five firm concentration ratios and the Herfindhal index15 were used); and a number of macroeconomic growth, real GDP growth and the inflation rate). However, only some of the country dummies and the Herfindahl index proved to be statistically significant and therefore only the results for these variables are reported.

In addition, a number of regulatory governance variables were included to capture the efficiency and effectiveness of the regulatory environment, which may have a significant effect on the performance of banks. These measures were obtained from two different sources: the World Bank and the Heritage Foundation in association with the Wall Street Journal. Together they provide 16 possible indicators. These variables were initially included in this stage of the regression analysis, but most proved to be statistically insignificant. Table 5 presents (Table 5 here.)

The DEA results in Table 5 suggest that banks which operate in Brazil and Panama tend to exhibit higher cost efficiency. Moreover, the coefficient of the Herfindhal index is small but positive, meaning that banks which operate in a more competitive environment tend to be more cost efficient. Also, the informal market variable is negatively related to bank efficiency; that is, as more transactions take place in the informal economy bank performance is reduced. This result is consistent with the notion that banks operate better where economic transactions take place in the formal economy -informal economies tend to be predominantly cash based. Turning to the government intervention variable, the result suggests that the more government interferes with production and consumption in the economy, the less well banks perform. The significance of the regulatory quality variable suggests that the better the quality of regulation in a country, the more efficient are its banks. Moreover, the negative effect of the voice and accountability variable on bank efficiency suggests that a country with greater political stability, and where civil liberties and political rights are better protected, have more efficient banking. In this case a lower score equates with more favourable conditions because of the way the indicator is The results obtained, using the SCF score as a dependent variable are generally consistent with the first set of results. In addition, the coefficients of two other country dummies are also positive and statistically significant -Colombia and Venezuela. The results also show that operating as a specialized government credit institution, on average, affects cost performance negatively. The variable fiscal burden of government also proved to be statistically significant. Not surprisingly, its coefficient is negative, denoting that that higher tax rates and government spending hinder the ability of businesses and individuals to pursue their objectives in the marketplace. Two variables have been excluded from the reported SCF results -the Herfindhal index and Regulatory Quality -because they were not statistically significant. 17

16 Country variables for Colombia and Panama and institutional variables for specialized governmental credit institutions and the fiscal burden of the government were included in an alternative regression but were statistically insignificant. These results are not reported. 17 In both sets of estimated results, some of the variables have been excluded. They proved to be statistically insignificant in the initial estimation of the models and were therefore dropped. A restriction test on each set of estimation was carried out and confirmed the validity of the restrictions imposed. The next step in our investigation was to re-run the earlier DEA and SCF models including the significant environmental and governance variables as inputs, given that they were shown to be correlated with bank efficiency. These results were consistent with the previous findings and neither private nor foreign ownership had a statistically significant effect on bank performance. For reasons of space we do not report these results in detail but they can be obtained from the authors.

Conclusions

This study has looked at the relative performance of state-owned and privately-owned and domestically-owned and foreign-owned banks across 20 Latin America countries, using cross-sectional data for 2001. Some previous studies (e.g. [START_REF] Megginson | From state to market: a survey of empirical studies on privatisation[END_REF] have suggested that private ownership leads to improved production efficiency. Equally, other studies [START_REF] Litan | Introduction, in Open doors: foreign participation in developing countries[END_REF] have argued that foreign ownership can improve the management of assets in emerging economies.

Triangulating the evidence using a set of commonly-used financial and economic performance ratios in banking, DEA and SCF analyses, the overall conclusion is that there is no strong evidence that privately-owned banks in Latin America performed better than their state-owned counterparts in 2001. However, there is some evidence that foreign-owned banks did not perform as well as their domestically-owned counterparts. The study also found that differences in performance were more related Table 6 provides a summary of the results in terms of the four research hypotheses. In the main, none of our research hypotheses was supported. At the same time, we recognize that the study has some weaknesses. The Bankscope database was used in the absence of a better alternative source. The use of this database meant that, in particular, only a cross-sectional analysis could be undertaken because of a lack of ownership data for years other than 2001. This means that we were unable to trace the impact of ownership changes over time. This is important because, while there may be no robust performance differences between privately-owned and state-owned and domestically-owned and foreign-owned banks in 2001, it could be that private banks and foreign banks achieved the largest efficiency gains over the previous years. This would be so if the banks privatized and those sold to foreigners were banks with the worst performance. This needs further research. Another weakness relates to the limited number of banks that could be included in the study for some of the 20 countries because of missing data. Perhaps the inclusion of more banks would have affected the results.

Nevertheless, the research findings are important given the public policy agenda, promoted by international organizations such as the World Bank, to encourage privatization and foreign involvement in the Latin American economies (World Bank, 1995;Saha and Parker, 2001). The findings do not suggest that improving bank The performance of banks will be affected by the degree of private investment

Mainly rejected

Rejected Rejected

Hypothesis 3:

Banks with foreign investors will perform more efficiently than banks with only domestic investors.

Mainly Rejected

Rejected Rejected

Hypothesis 4:

The larger the share of foreign capital in the total capital of banks, the higher the resulting level of efficiency achieved.

Rejected

  of the performance results

  examined the impact of foreign entry on bank efficiency in Australia and concluded that foreign banks are not necessarily more profitable. Moreover, Blomström and Kokko (1998) suggested that local firms may operate more efficiently due to two main factors: domestic firms have better knowledge of local markets and

  relatively well. Equally, if governments privatize their worst performing banks first to reduce the fiscal burden of financing losses, and banks try harder to attract foreign investors when in desperate need of recapitalization, then the alternative bias could result. The study could be biased in favour of finding that stateowned and domestically-owned banks perform relatively well or as Green et al.

  i = 1,2 and SH i denotes the two cost shares functions. The results obtained are in line with those obtained from the DEA and SCF and N N is an Nx1 vector of ones.

  we concentrate mostly on the analysis of the cost structure of banks and therefore the DEA model presented uses an input orientation, where banks should minimize the use of inputs, given a certain amount of outputs produced. Only the VRS results are reported because we would expect banking to be subject to variable returns to scale -an expectation which is confirmed by our cost function results.

  (av.) figures and standard deviations (s.d.) are given. The standard deviations confirm considerable dispersion of data amongst banks in the different8 The translog cost function is based on a flexible form production function that places few restrictions on the underlying production technology. It is, therefore, the most appropriate cost function to use -tailed t-tests were therefore undertaken to determine whether the difference between the means for each of the performance measures was statistically significant at the 10% level or better.

  banks seem to consistently outperform Brazilian banks in all the different ownership categories considered; while Jamaican and Uruguayan banks tend to exhibit noticeably lower performance than Brazilian banks irrespective of ownership.

  bank performance can be expected to be affected by the state of the economy (namely nominal GDP per capita, real GDP per capita, nominal GDP

  a summary of the significant results using restricted ordinary least squares regressions, with the DEA and SCF efficiency scores as the dependent variable in each of the sets of estimated results presented and the environmental variables and governance indicators that proved to be statistically significant as the independent variables. The indicators that proved statistically significant are the informal market (reflecting services supplied in the informal economy), government intervention in the economy (which reflects, among other things, government consumption and production as a percentage of the economy and the extent of state control of businesses), regulatory quality (which takes into consideration the existence of policies that may hinder the operation of fiscal burden of government (which considers the top marginal income and corporate tax rates as well the change in the ratio of government expenditure to GDP) and voice and accountability (reflecting the political process, civil liberties and political rights).

  , state ownership and foreign ownership were also included in the regressions as dummy variables. Both once again proved not to be statistically significant. This indicates that the regulatory and competitive environment in which banks operate was more important than a bank's ownership structure in explaining performance variations across banks in Latin America in 200116 .

  regulatory and economic environment and therefore to the country in which the banks operate than to ownership.

Figueira

  Figueira, C., Nellis. J. and Parker, D. (2004) Is the Polish banking industry ready for EU entry? A comparative study of performance in commercial banking in Poland and the UK, Academy of International Business UK Conference Proceedings, St.Andrews, United Kingdom.

Table 1

 1

	provides details of the number of banks and the percentage
	of bank assets included in the study for each of the 20 countries 5 . The largest
	concentration of banks in the study is in Brazil (73 banks). The appendix provides a
	summary of descriptive statistics for the data used and the performance scores
	reported below.
	(Table 1 here.)
	5 Argentina was excluded from the study due to the fact that it was in a severe financial crisis in 2001
	and this could bias the results. Small Caribbean islands, such as Bermuda and the Cayman Islands,

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	different performances in terms of generating operating income from their assets and
	profitability.
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	between domestic and majority foreign-owned banks, but significantly higher in
	banks with minority foreign ownership.
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  Table 2 and described above -i.e. at the individual country level

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11

The ownership categories for both state ownership and

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  The next stage of the study is an analysis of performance across countries. Table4presents two sets of results, based on average DEA efficiency scores for banks in eight of the 20 countries in our sample 12 . These eight countries are the ones with the largest number of banks for which we have data. For the other countries, there were too few banks to carry out this stage of the statistical analysis. Firstly, the table shows how privately-owned banks perform in relation to state-owned banks, and how domestically-owned banks perform in relation to foreign-owned banks in the eight countries. Secondly, Table4also shows how bank performance differs across countries, by considering Brazilian banks as the benchmark.13

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	performance is simply a matter of changing ownership. Rather, the causes of bank Bartel, A.P. and Harrison, A.E. (1999) Ownership versus Environment: why are
	performance seem to be found in wider economic and regulatory issues, although this Public Sector Firms Inefficient?, National Bureau of Economic Research
	needs much fuller investigation than has been possible in this paper. Future research working paper no. 7043.
	could usefully focus on the macroeconomic and regulatory regimes necessary to Battese, G.E. and Coelli, T.J. (1995) A model for technical inefficiency effects in a
	promote maximum performance within Latin American banking. stochastic frontier production function for panel data, Empirical Economics 20,
	F o r F o r 325-332. F o r Beach, W.W. and. Miles, M.A. (2004) Explaining the Factors of the Index of
	P e e r P e e r Economic Freedom in Index of Economic Freedom, The Heritage Foundation P and the Wall Street Journal. e e r Beck, T., Crivelli, J.M. and Summerhill, W. (2003) State Bank Transformation in
	R e v i e w R e v i e w Brazil -Choices and Consequences, World Bank Policy Research working paper R no. 3619. e Berger, A.N. (1993) Distribution-Free Estimates of Efficiency in the US Banking v i Industry and Tests of the Standard Distributional Assumptions, Journal of e w Productivity Analysis 4, 261-292.
	Berger, A.N., Clarke, G.R.G., Cull, R., Klapper, L. and Udell, G.F. (2003) Corporate
	Governance and Bank Performance: A Joint Analysis of the Static, Selection and
	Dynamic Effects of Domestic, Foreign and State Ownership, including Domestic
	M&As, Foreign Acquisitions and Privatization, World Bank Conference
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	Berger, A.N., Demsetz, R.S. and Strahan, P.E. (1999) The consolidation of the
	financial services industry: Causes, consequences, and implications for the
	future, Journal of Banking and Finance 23, 135-194.
	Berger, A.N. and Humphrey, D.B. (1997) Efficiency of financial institutions:
	International survey and directions for future research, European Journal of
	Operational Research 98, 172-212. F o r Berger, A.N. and Mester, L.J. (1997) Inside the black box: what explains differences
	in the efficiencies of financial institutions, Journal of Banking and Finance 21, P 898-947. e e r Bhattacharyya, A., Lovell, C.A.K. and Sahay, P. (1997) The impact of liberalization
	on the productive efficiency of Indian commercial banks, European Journal of R Operational Research 98 (2), 332-345. e Bikker, J.A. and Haaf, K. (2002) Competition, concentration and their relationship: v i an empirical analysis of the banking industry, Journal of Banking and Finance e w 26, 2191-2214.
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	Boardman, A.E. and Vining, A. (1989) Ownership and Performance in Competitive
	Environments: A Comparison of the Performance of Private, Mixed and State-
	Owned Enterprises, Journal of Law and Economics 31 (1), 1-33.
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	Demirgüç-Kunt, A. and Huizinga, H. (1999) Determinants of commercial bank
	interest margins and profitability: Some international evidence, World Bank
	Economic Review 13 (2), 379-408.
	Fama, E.F. and Jensen, M.C. (1983) Separation of ownership and control, Journal of
	Law and Economics 26, 301-325.
	F o r F Fama, E.F. (1980) Agency problems and the theory of the firm, Journal of Political o r Economy 88 (2), 288-307.
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	Shleifer, A. and Vishny, R.W. (1994) Politicians and Firms, The Quarterly Journal of
	Economics 106, 995-1025.
	Sturm, J.-E. and Williams, B. (2004) Foreign bank entry, deregulation and bank
	efficiency: Lessons from the Australian experience, Journal of Banking and
	Finance 28 (7), 1775-1799.
	F o r F o r F o r F Unite, A.A. and Sullivan, M.J. (2003) The effect of foreign entry and ownership o r structure on the Philippine domestic banking market, Journal of Banking and
	P P P P Finance 27, 2323-2345.
	e e r e e r e e r Verbrugge, J., Owens, W. and Megginson, W. (1999) State Ownership and the e e r Financial Performance of Privatised Firms: An Empirical Analysis, Proceedings
	R e v i e w R e v i e w R e v i e w of a Policy Research Workshop at the World Bank. 15-16 March 1999, Dallas, R Federal Reserve Bank Dallas. e Weill, L. (2003) Banking efficiency in transition economies: The role of foreign v i ownership, Economics of Transition 11, 569-592. e w World Bank (1995) Bureaucrats in Business: The Economics and Politics of
	Government Ownership, Oxford, Oxford University Press for the World Bank:
	Oxford.
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Table 1 : Data on the size and number of Latin American banks included in the sample

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	Page
	Countries	Total Assets	Sample Assets	Assets	Total number
		(thousand US$)	(thousand US$)	included (%)	of banks
	Belize	785,800	403,750	51	2
	Bolivia	4,663,309	3,136,530	67	5
	Brazil	616,241,990	452,701,344	73	73
	Chile	67,994,986	42,831,957	63	14
	Colombia	379,499,925	21,093,064	6	17
	Costa Rica	11,183,671	3,732,710	33	9
	Cuba	1,327,675	657,322	50	2
	Dominican Republic	14,869,316	1,720,636	12	3
	Ecuador	6,369,667	1,051,500	17	4
	El Salvador	9,738,165	3,848,600	40	4
	Guyana	349,881	295,040	84	2
	Honduras	3,691,461	1,021,171	28	3
	Jamaica	7,442,236	3,205,342	43	10
	Mexico	348,046,236	58,055,401	17	3
	Panama	41,085,644	10,672,615	26	14
	Paraguay	2,541,103	566,442	22	3
	Peru	22,686,336	13,290,635	59	11
	Suriname	227,326	225,314	99	2
	Uruguay	23,267,699	1,864,400	8	13
	Venezuela	30,715,535	11,710,518	38	10

41 of 47 Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Submitted Manuscript F o r P e e r R e v i e w 42Table 2 : Performance ratios for the Latin American banks studied

 2

	Banks	Total	Overheads/	Personnel	Output/	Operational	Return	Interest	Net	Loan Loss	Equity/
		Costs/	Total	Expenses/	Total	Income/	on Assets	Rate	Interest/	Provisions/	Total
		Output	Assets	Total	Assets	Total Assets	(ROA)	Spread	Total	Total Assets	Assets
		(TC/Y)	(OV/TA)	Costs	(Y/TA)	(OI/TA)		(IRS)	Assets	(P/TA)	(E/TA)
				(PE/TC)					(NI/TA)
		av. (s.d.)	av. (s.d.)	av. (s.d.)	av. (s.d.)	av. (s.d.)	av. (s.d.)	av. (s.d.)	av. (s.d.)	av. (s.d.)	av. (s.d.)
	Private	0.35 (0.70)	0.06 (0.06)	0.15 (0.09)	0.85 (0.10)	0.10 (0.09)	1.88 (3.74)	0.26 (1.15)	0.07 (0.06)	0.02 (0.03)	0.16 (0.13)
	Less than 50% state	0.18 (0.07)***	0.06 (0.02)	0.23 (0.14)	0.77 (0.10)**	0.08 (0.04)	1.13 (1.94)	0.15 (0.13)	0.06 (0.02)	0.01 (0.01)*	0.12 (0.06)*
	50% or more state	0.21 (0.09)**	0.08 (0.05)	0.21 (0.14)**	0.84 (0.12)	0.10 (0.07)	-0.26 (6.11)	0.19 (0.39)	0.06 (0.07)	0.02 (0.03)	0.17 (0.13)
	Domestic	0.19 (0.10)	0.06 (0.05)	0.17 (0.10)	0.85 (0.11)	0.10 (0.09)	2.01 (4.44)	0.31 (0.96)	0.07 (0.06)	0.01 (0.02)	0.17 (0.15)
	Less than 50% foreign	0.25 (0.18)	0.11 (0.11)*	0.17 (0.08)	0.84 (0.06)	0.14 (0.12)	0.62 (3.44)	0.18 (0.16)	0.09 (0.09)	0.03 (0.05)*	0.15 (0.12)
	50% or more foreign	0.55 (1.01)***	0.06 (0.04)	0.14 (0.10)*	0.84 (0.11)	0.10 (0.07)	1.32 (3.74)	0.19 (1.35)	0.07 (0.05)	0.01 (0.02)	0.15 (0.12)
	av -arithmetic mean, s.d. -standard deviation.
	Significance at: ***1% level, ** 5% level, * 10% level.

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Table 3 : The DEA and SCF efficiency scores

 3

	Banks	Total no.	DEA score	SCF score
			av. (s.d.)	av. (s.d.)
	All	202	58.26 (28.72)	80.19 (6.62)
	Private	171	58.06 (29.38)	80.24 (6.65)
	Less than 50% state	7	60.65 (15.22)	81.18 (4.46)
	50% or more state	24	58.95 (27.71)	79.59 (7.06)
	Domestic	100	60.47 (27.89)	80.81 (6.64)
	Less than 50% foreign	23	67.09 (23.22)	76.63 (8.43)**
	50% or more foreign	79	52.88 (30.46)*	80.46 (5.70)
	av -arithmetic mean, s.d. -standard deviation; * significantly different from the DEA / SCF score for
	domestic ownership at 10% level of confidence; ** at 5% level of confidence.

Page 43 of 47 Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Submitted Manuscript F o r P e e r R e v i e w 44Table 4 : Efficiency scores of banks in selected Latin American countries, using DEA

 4 Significance at: ***1% level, ** 5% level, * 10% level in relation to Brazilian banks in each bank category; Significance at: † † † 1% level, † 10% level in relation to domestic banks in each country.

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	Countries		All				Private ownership	50% or more state	Domestic ownership	50% or more foreign
									ownership						ownership
		Total	DEA	100%	Total	DEA	100%	Total	DEA	100%	Total	DEA	100%	Total	DEA	100%
		no.	score	eff		no.	score	eff	no.	score	eff	no.	score	eff	no.	score	eff
			av.	%			av.	%		av.	%		av.	%		av.	%
			(s.d.)				(s.d.)			(s.d.)			(s.d.)			(s.d.)
	Brazil Chile Colombia	73 14 17	63.25 (26.84) 90.52 (9.90)*** 53.82 (24.68) F 26.03 35.71 11.76 o r	60 13 10	62.13 (27.31) 92.19 (7.99)*** 49.95 (22.22)	25.00 38.46 0.00	9 0 7	73.08 (26.75) -59.35 (28.69)	44.44 -28.57	40 6 11	65.01 (26.85) 96.77 (3.72)*** 59.54 (26.88)	30.00 50.00 18.18	26 5 4	60.05 (28.89) 83.58 (4.42)*** † † † 39.38 (15.65)** †	26.92 40.00 0.00
	Jamaica Panama Peru Uruguay	10 14 11 13	47.82 (18.71)** 74.22 (25.19) 60.35 (22.41) 19.44 (24.76)***	0.00 28.57 9.09 7.69	9 14 P 7 13 e (19.52)** 46.76 74.22 (25.19) 61.27 (22.57) 19.44 (24.76)*** e r	0.00 28.57 14.29 7.69	1 0 4 0	57.32 (-)* -40.6 (29.11)* -	0.00 -0.00 -	6 4 2 -	45.74 (13.94)*** 82.75 (20.10) 55.86 (40.95) -	0.00 25.00 100.0 -	3 10 6 13	46.21 (30.38) 70.81 (27.14) 62.77 (24.34) 19.44 (24.76)***	0.00 30.00 33.33 7.69
	Venezuela av -arithmetic mean, s.d. -standard deviation; 10 52.28 (26.18)	10.00		10	52.28 (26.18) R 10.00 e v i 0 e w	-	-	7	54.40 (30.41)	14.29	3	47.33 (16.08)	0.00
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Table 5 : Testing for the effects of environmental and governance factors

 5

	Dependent variable	bank DEA efficiency scores	bank SCF efficiency scores
		coefficient	coefficient
	Explanatory variables
	(all variables are in logs)
	Constant	80.43 [6.30]***	77.08 [19.69]***
	State ownership	-3.22 [-0.50]	0.82 [0.44]
	Foreign ownership	-11.02 [-2.64]***	-0.31 [-0.30]
	Brazil	37.31 [6.05]***	4.43 [2.37]**
	Colombia	-	8.39 [2.76]***
	Panama	50.55 [5.08]***	5.84 [2.73]***
	Venezuela	-	7.99 [2.54]**
	Specialized governmental credit	-	-6.40 [-2.39]**
	institution
	Herfindahl index	0.01 [3.59]***	-
	Informal market	-13.61 [-2.49]**	-1.63 [-1.82]*
	Government Intervention	-13.86 [-2.84]***	-5.29 [-2.90]***
	Regulatory Quality	19.60 [2.82]***	-
	Fiscal Burden of the Government	-	-6.79 [-4.06]***
	Voice and Accountability	-40.03 [-6.08]***	8.07 [3.73]***
	Adjusted R 2	0.22	0.09
	F-stat	4.43***	2.77***
	DW	1.87	1.98
	Heteroskedasticity 3 2	1.41	1.72
	Significance at: ***1% level, ** 5% level, * 10% level

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Table 6 : Summary of the results in terms of the research hypotheses

 6

	Hypotheses	Performance	DEA	SCF
		Ratios
	Hypothesis 1:	Mainly	Rejected	Rejected
	Banks with private capital will operate	rejected
	more efficiently than banks mainly
	dependent on state capital
	Hypothesis 2:

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			Appendix: Descriptive statistics
	Variables		Mean	Median	Standard	Minimum	Maximum
					deviation
	Total Costs/Output		0.33	0.18	0.65		0.02	4.19
	Overheads/Total Assets		0.07	0.05	0.06		0.01	0.42
	Personnel Expenses/Total Costs		0.16	0.15	0.10		0.01	0.50
	Output/Total Assets		0.84	0.87	0.11		0.49	1.00
	Operational Income/Total Assets		0.10	0.08	0.09		-0.03	0.68
	Return on Assets		1.58	1.44	4.58	-26.39	20.80
	Interest Rate Spread F o Net Interest/Total Assets	0.25 0.07	0.12 0.05	1.07 0.06		-6.24 -0.03	8.77 0.40
	r Loan Loss Provisions/Total Assets 0.02	0.01	0.03		-0.03	0.26
	Equity/Total Assets Loans Other Earning Assets Labour Costs	0.16 P 1287565 e 1318617 e 242202 0.12 139257 r 75592 8762	Rejected 3867937 0.13 4329080 267987	0.04 1 16 48	Mainly rejected 36201388 0.98 36717289 2431046
	Non Labour Costs Interest Costs Capital Costs DEA score Price of Labour Price of Capital Price of Deposits		103172 291068 201815 58.26 10.90 4.72 1.32	11501 46738 R 9922 e 339657 831211 792005 v 54.29 28.72 i 2.84 16.78 e 0.18 5.35 w 3.91 1 22 1 0.01 0.06 0.10 14.96 0.02	2558654 5619635 9914373 100.0 87.84 16.22 212.60
	SCF score		80.19	81.09	6.62	50.90	94.11
	Herfindhal index		892.81	521.49	799.25	465.37	6425.37
	Informal market		3.39	3.50	0.64		1.50	5.00
	Government intervention		2.73	3.00	0.47		1.00	4.00
	Regulatory Quality		0.47	0.36	0.49		-0.96	1.35
	Voice and Accountability		0.41	0.53	0.47		-0.59	1.31
	Fiscal Burden of the Government		2.91	2.50	0.62		1.50	4.50
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Some studies, e.g.[START_REF] Bonin | Bank performance, efficiency and ownership in transition countries[END_REF] adopt a panel data analysis but using ownership data for only one year during the period covered. This approach we believe is flawed because ownership is not consistent over time in Latin America.

Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Submitted Manuscript

SCF results are also available on this. However, as the results obtained provide generally similar conclusions to those obtained by DEA, they are not reported here. They are available from the authors at the reader's request.

Brazilian banks are used as a benchmark in the analysis due to the fact that Brazil is the biggest economy in Latin America.

In four out of the eight countries presented, the sample does not include banks which are at least 50% state owned.

These were computed from the Bankscope data and therefore correctly only reflect concentration within the sample of banks included.

Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Submitted Manuscript