Efficiency of Turkish banking: Two-stage network system. Variable returns to scale model

This study curries out a systematic analysis of the cost, technical and allocative efficiency of the Turkish banking system from 1991 to 2007, under the assumption of variable returns to scale. This unique dataset allows to analyse changes in bank efficiency before and after the financial crises. The applied estimation approach is based on a two-stage network model introduced by Fukuyama and Weber (2010), where in the first stage of production, banks use inputs to produce an intermediate output (deposits) that becomes an input to a second stage where final outputs are produced. We have found several interesting results. Our results show that bank efficiency reflected the state of the Turkish economy before and after crises in 1993–1994 and 2000–2001. Furthermore, there persists a gap between the best and worst performing banks. We could not confirm the hypothesis that foreign banks have higher efficiency scores as we saw in new EU countries.