Technical, Scale, and Allocative Efficiencies in U.S. Banking: An Empirical Investigation

TLDR

A nonparametric frontier method was applied to 322 banks’ 1986 FDIC Call Report data to compute overall, technical, pure technical, allocative, and scale efficiencies, with separate frontiers constructed to assess the impact of branching. The analysis revealed low overall efficiency, with technical inefficiency dominating and no significant difference between branching and non‑branching banks.

Abstract

A nonparametric frontier approach is used to calculate the overall, technical, pure technical, allocative, and scale efficiencies for a sample of 322 independent banks. The sample was drawn from the Federal Deposit Insurance Corporation tapes on the Reports of Condition and Reports of Income (Call Reports) for the year 1986. The results indicated a low level of overall efficiency. The main source of inefficiency was technical in nature, rather than allocative. Separate efficiency frontiers were constructed to test the effect of branching. However, the distributions of efficiency measures for branching and non-branching banks were not found to be different.