Convergence in bank performance: Evidence from Latin American banking

In this paper, we examined the dynamic convergence in cost and profit efficiency levels for a large panel of banks in 19 Latin American and the Caribbean countries over the period 1999-2013. Off-balance sheet activities items are important in the region. However, the models excluding OBS perform better than the models including it. Country environmental variables are the key determinants of profit efficiency; bank-specific variables determine cost efficiency with country variables influencing technology. Cost inefficiency correlates negatively with bank size, and positively with risk, liquidity and capitalization. The cost function shifts down with financial depth and the concentration of deposits, and up as the economy grows and urbanization increases. Evidence on overall convergence is mix, depending on methodology. However, convergence is achieved for both types of efficiency within two sub-groups of countries (“club convergence”).