Applying the New Metafrontier Directional Distance Function to Compare Banking Efficiencies in Central and Eastern European Countries

This paper establishes a new metafrontier directional technology distance function (MDDF) under a stochastic framework, rather than a deterministic setting like the one proposed by Battese et al. (2004). The new MDDF allows for calculating comparable technical efficiencies for banks under different technologies relative to the potential technology available to the industry across nations. The inefficiency term of the new MDDF is further associated with relevant environmental variables of the form proposed by Battese and Coelli (1995). The new MDDF is then applied to examine and compare bank efficiencies of 17 Central and Eastern European countries. Non-performing loans (NPLs) are regarded as an undesirable, jointly produced with various loans, and the omission of them tends to underestimate technical inefficiency scores. Evidence is found that the estimated technology gap dominates technical efficiencies. Bank managers are suggested to swiftly adopt new financial innovations with an eye to shift the group frontier closer to the metafrontier.