Comparative Analysis of Bank Productivity in Emerging vs. Developed Markets

Thesis Abstract

This study investigates the determinants and comparative dynamics of bank productivity in emerging versus developed markets to address a persistent gap in cross-regional efficiency analysis amid rapid digitalization and financial liberalization. The problem hinges on whether productivity gains in developed markets, driven by advanced technologies, capital deepening, and stable regulatory environments, translate into similar gains in emerging markets where constraints such as credit risk, underdeveloped infrastructure, and weaker governance may impede efficiency improvements. The aim is to quantify and compare bank productivity and its drivers across market groups, while identifying regime-dependent factors that influence efficiency. Specific objectives are (i) to measure total factor productivity (TFP) of banks using a Malmquist productivity index over 2010–2023; (ii) to decompose productivity into core components—technical efficiency, scale efficiency, and technological change; (iii) to examine the impact of capitalization, non-performing loan (NPL) ratios, digitalization, and regulatory quality on productivity; (iv) to test the moderating role of macroeconomic stability and market structure; and (v) to compare the effectiveness of policy reforms in enhancing productivity between groups. The methodology adopts a cross-sectional, longitudinal design leveraging a balanced panel of listed commercial banks from 20 emerging economies and 20 developed economies, totaling approximately 800 bank-year observations. Data are sourced from banking annual reports, Thomson Reuters Eikon, and World Bank World Development Indicators, with supplementary data on regulatory indices from the IMF Financial Sector Assessment Program and the World Governance Indicators. A two-stage approach is employed first, a non-parametric frontier analysis using Data Envelopment Analysis (DEA) to estimate efficiency scores, Malmquist indices, and decompositions; second, a panel regression framework to identify determinants of productivity changes, using System GMM to address potential endogeneity. The analysis tests a set of hypotheses linking productivity to (i) capitalization adequacy, (ii) asset quality (NPL coverage), (iii) ICT investment and digital banking adoption, (iv) competition (Lerner index), (v) regulatory quality, and (vi) macroeconomic stability (inflation, exchange rate volatility). Robustness checks include alternative specifications of the production frontier (Cobb-Douglas and Translog), placebo analyses with subsamples, and cross-validation against observed bank performance metrics. The expected findings indicate that developed markets exhibit higher baseline productivity and more favorable growth in TFP due to advanced IT infrastructure, stronger governance, and deeper capital markets; however, emerging markets show substantial productivity gains driven by digitization and targeted regulatory reforms, with convergence tendencies in the post-2015 period. It is anticipated that the Technological Change component will be the main driver in developed markets, while Technical Efficiency improvements will dominate in emerging markets as banks optimize operations and scale efficiently. The study also expects a significant negative impact of high NPLs on productivity in emerging markets, moderated by stronger bank capital and improved risk management practices. Digitalization is hypothesized to positively influence productivity across both groups, with a larger marginal effect in emerging markets where digital channels substitute for underdeveloped branch networks. The study contributes to knowledge by providing the first comprehensive cross-regional, longitudinal assessment of bank productivity using a unified DEA-Malmquist and panel data approach, clarifying which drivers are regime-dependent and how policy reforms translate into efficiency gains. The findings offer actionable insights for policymakers and bank managers in developed markets, emphasis should be on sustaining technological advancement and regulatory stability to sustain productivity growth; in emerging markets, prioritizing NPL reduction, capital adequacy, digital transformation, and competitive dynamics can yield substantial productivity improvements. The main conclusion is that while productivity gaps persist between emerging and developed markets, targeted reforms and prudent digital adoption can generate meaningful efficiency convergence, suggesting a path for policy coordination and strategic investment in the global banking system. Recommendations include accelerating digital infrastructure investments, strengthening balance sheet quality through capital buffers and risk management improvements, and harmonizing regulatory quality enhancements to foster cross-border efficiency spillovers.