Measuring the Cost Efficiency of Lebanese Commercial Banks using the Stochastic Frontier Approach

Abstract This paper attempts to measure the cost efficiency of 44 banks operating in Lebanon throughout the period 1992-2016, using the stochastic frontier technique. The additional purpose of this study is to detect the impact of some endogenous and exogenous factors on the cost efficiency scores calculated. The empirical results show a stabilization in the cost efficiency of Lebanese banks over the period studied and that on average those banks could reduce up to 12% of their allocated resources while maintaining the same level of their final outputs. We also found that cost efficiency among Lebanese banks is driven by 1) macroeconomic factors such as economic growth and inflation development and 2) by banks specific factors such as liquidity, capitalization, profitability and the diversification strategy. JEL classification numbers: C10, C67, D61, G20, G21. Keywords: Stochastic frontier, Parametric approach, Cost efficiency, Banks, Efficiency determinants.