The objective of this paper is to analyse the efficiency of the Italian Banking System over
the period 2006-2011. The Stochastic Frontier Approach (SFA) is applied to a panel of 700 Italian Banks.
The analysis is based on the joint estimation of a cost function and an efficiency equation (Battese and
Coelli, 1995). Following the intermediation approach (Sealey and Lindley, 1977), bank outputs are comprised
of loans, the non-interest income and securities. Besides the controlling variables, the efficiency
equation includes an indicator of credit quality. The main results are fourfold. First, cost efficiency does
not show regular dynamics over time and ranges from 0.86, observed in 2008, to 0.92 in 2011. Secondly,
it indicates that the cost efficiency of cooperative banks (CCB) is always higher than that observed for
joint-stock companies (LTD) and Popolari banks. Third, the study suggests that cost efficiency tends to
decrease as bank size increases. Finally, as regards the role of the determinants of banks efficiency («what
makes a bank efficient»), we find that there are positive relationships between efficiency and credit quality,
the solvency index, the industry concentration index and the FTSE.
