Inside the black box: What explains differences in the efficiencies of financial institutions?

TLDR

Research has measured financial institution efficiency, finding large inefficiencies of about 20 % of costs and half of potential profits, yet the sources of these differences remain unclear. This paper investigates possible sources of efficiency variation, including concept differences, measurement methods, and bank, market, and regulatory characteristics. The authors review existing literature and analyze US bank data from 1990–1995. They provide new evidence on the determinants of efficiency differences across banks, markets, and regulatory environments.

Abstract

Over the past several years, substantial research effort has gone into measuring the efficiency of financial institutions. Many studies have found that inefficiencies are quite large, on the order of 20% or more of total banking industry costs and about half of the industry's potential profits. There is no consensus on the sources of the differences in measured efficiency. this paper examines several possible sources, including differences in efficiency concept, measurement method, and a number of bank, market, and regulatory characteristics. We review the existing literature and provide new evidence using data on US banks over the period 1990–1995.