An Innovative Bayesian Multiple Indicator-Multiple Cause Analysis of Bank Productivity

Izzeldin, Marwan and Mamatzakis, Emmanuel C. and Murphy, Anthony and Pappas, Vasileios and Tsionas, Mike (2025) An Innovative Bayesian Multiple Indicator-Multiple Cause Analysis of Bank Productivity. Review of Quantitative Finance and Accounting. ISSN 0924-865X (In Press)

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Abstract

Using Bayesian Monte Carlo methods, we augment a stochastic distance function measure of bank efficiency and productivity growth with indicators of financial stability, profitability, and capitalization. Our novel Multiple Indicator-Multiple Cause (MIMIC)-style model provides more precise estimates of policy-relevant parameters, including bank efficiency and productivity growth. Analyzing EU-15 banks from 2008 to 2015, we find significant disparities in efficiency, revealing a ‘two-speed’ banking sector. Productivity growth has declined, driven primarily by technological regress rather than managerial inefficiencies. Small and peripheral banks exhibit lower efficiency than larger, core-EU banks, though productivity growth appears stronger among smaller institutions. We show that greater technical efficiency is associated with higher profitability, capitalization, and financial stability, as well as reduced earnings volatility.