Ecuador's Banking Sector: How Intrinsic and Extrinsic Factors Shape Productivity? (#2022)

Authors

Ruiz, Miguel

Estrada, Leonardo

Yoong, Cristina

Ormeño-Candelario, Vanessa

Abstract

This article investigates how intrinsic and extrinsic factors related to bank management affect bank production in the short and long run. Currently, research on banking productivity tends to focus on identifying influencing variables; however, the literature does not discriminate between temporary and long-term effects, nor does it demonstrate the mechanisms by which these variables exercise their effects. An error correction model is used to determine how interest-related variables affect banking productivity. In addition, the Malmquist Index, as expanded in the context of Data Envelopment Analysis (DEA) is applied to calculate the productivity. The findings demonstrate that bank productivity is unaffected by levels of international uncertainty, either short or long term. The impact of exogenous variables on banking productivity in Ecuador was also investigated. The results revealed that risk management emerges as a critical element, with a detrimental impact in both the short and long term. A negative association was also found between the delinquency rate and bank productivity, the main mechanism of influence being the fall in technical efficiency. Finally, policy recommendations and strategies that could be implemented to improve banking productivity are presented.