Determinants of Bank Efficiency during Financial Restructuring Period: Indonesian Case

Abstract

The banking sector in Indonesia had been through many challenges aftermath the 1997 Asian financial crisis. The restructuring programs aimed to strengthen and improve the performance of the banking system. Empirical researches around the world, however, present various result with regard to the effect of the policy on bank efficiency. We investigated the determinants of the relative efficiency of the Indonesian banking industry. Using panel data of 101 Indonesian commer- cial banks, this study employs a non-parametric frontier method, Data Envelop- ment Analysis (DEA), to measure the efficiency score. In the second stage, the Tobit regression model used to analyze the factors that potentially determine the variation of efficiency score. The finding indicated the bank was technically inefficient particularly during financial restructuring. The improvement was evidence toward the end of the period. Bank size, macroeconomic factors, and three bank groups were strongly associated with bank efficiency level. There was no strong evidence that merger, which typically the form of restructuring policy output, positively associated with bank efficiency.