# Measurement of efficiency and its drivers in the Chilean banking industry

## TL;DR

This paper analyzes the efficiency of Chilean banks from 2000 to 2019 and finds that ownership and size positively impact efficiency.

## Contribution

The study introduces a novel approach using input-distance functions and a nonparametric slack-based model for efficiency analysis.

## Key findings

- Chilean banks have maintained high efficiency levels without significant changes over the study period.
- Ownership type and bank size positively influence efficiency.
- Mergers and acquisitions target efficient banks to improve short-term efficiency.

## Abstract

This paper estimates efficiency measures for the banking system in Chile for the period 2000-2019. In contrast to previous studies, we use input-distance functions, introduce the nonparametric slack-based model, and choose the intermediate inputs approach in determining inputs and outputs. Our results suggest that the Chilean system has achieved relatively high levels of efficiency, although with no significant variation over the sample period. Ownership (government, foreign and public) and size had a positive impact on efficiency. On average, mergers and acquisitions seem to have targeted highly efficient banks in order to improve the overall efficiency of the controlling institution in the short run. Other sources of efficiency gains could be an increase in bond funding or a reduction in expenses and capital holdings. The latter could be induced by deepening the local derivatives market.