Cost frontier efficiency and risk-return analysis in an emerging market

The paper investigated cost efficiencies and its relationship with risk-return behavior of banks in United Arab Emirates (U.A.E.). The major findings are that there were 10-25% inefficiencies in these banks under different cost specifications. On the risk-return front, lower liquidity and lower capitalization risks coupled with higher ROE significantly improved the cost efficiencies of the banks. Further, domestic banks were relatively cost efficient than foreign banks. These findings are useful to emerging market participants in their investment decisions, as also the policymakers and bank regulators to monitor inefficient banks in the context of revised Basel capital norms.