David B. Humphrey

Efficiency of financial institutions: International survey and directions for future research

Abstract This paper surveys 130 studies that apply frontier efficiency analysis to financial institutions in 21 countries. The primary goals are to summarize and critically review empirical estimates of financial institution efficiency and to attempt to arrive at a consensus view. We find that the various efficiency methods do not necessarily yield consistent results and suggest some ways that these methods might be improved to bring about findings that are more consistent, accurate, and useful. Secondary goals are to address the implications of efficiency results for financial institutions in the areas of government policy, research, and managerial performance. Areas needing additional research are also outlined.

Competitive viability in banking: Scale, scope, and product mix economies☆

Abstract Conventional scale and scope economies are inadequate to determine the competitive viability of banks that vary in scale and product mix simultaneously. This paper develops two new and more general measures of multi-product economies. Slight diseconomies of scale and product mix are found for banks, usually on the order of 1 to 3 percent, which may be due to demand-side influences. These are robust to differing cost and output specifications, organizational levels, and competitive environments. These results differ from other banking studies that found scope economies, a conflict that may be due to methodological difficulties.

Consistency Conditions for Regulatory Analysis of Financial Institutions: A Comparison of Frontier Efficiency Methods

We propose a set of consistency conditions that frontier efficiency measures should meet to be most useful for regulatory analysis or other purposes. The efficiency estimates should be consistent in their efficiency levels, rankings, and identification of best and worst firms, consistent over time and with competitive conditions in the market, and consistent with standard nonfrontier measures of performance. We provide evidence on these conditions by evaluating and comparing efficiency estimates on U.S. bank efficiency from variants of all four of the major approaches -- DEA, SFA, TFA, and DFA -- and find mixed results.

Bank efficiency derived from the profit function

Abstract Both input and output inefficiencies are derived from a profit function for US banks. These inefficiencies are decomposed into allocative and technical components in a new way using shadow prices. About half of all potential variable profits are estimated to be lost to inefficiency. Most inefficiencies are from deficient output revenues, rather than excessive input costs. Larger banks are found to be more efficient than smaller banks, which may offset scale diseconomies found elsewhere. Tests of a new concept, ‘optimal scope economies’, suggest that joint production is optimal for most banks, but that specialization is optimal for others.

Original ArticlesConsistency Conditions for Regulatory Analysis of Financial Institutions: A Comparison of Frontier Efficiency Methods

We propose a set of consistency conditions that frontier efficiency measures should meet to be most useful for regulatory analysis or other purposes. The efficiency estimates should be consistent in their efficiency levels, rankings, and identification of best and worst firms, consistent over time and with competitive conditions in the market, and consistent with standard nonfrontier measures of performance. We provide evidence on these conditions by evaluating and comparing efficiency estimates on U.S. bank efficiency from variants of all four of the major approaches -- DEA, SFA, TFA, and DFA -- and find mixed results.

Efficiency of Financial Institutions: International Survey and Directions for Future Research

This paper surveys 130 studies that apply frontier efficiency analysis to financial institutions in 21 countries. The primary goals are to summarize and critically review empirical estimates of financial institution efficiency and to attempt to arrive at a consensus view. We find that the various efficiency methods do not necessarily yield consistent results and suggest some ways that these methods might be improved to bring about findings that are more consistent, accurate and useful. Secondary goals are to address the implications of efficiency results for financial institutions in the areas of government policy, research and managerial performance. Areas needing additional research are also outlined.

Scale Economies in Banking: A Restructuring and Reassessment

THE ISSUE OF scale economies in banking has a rich history. Most earlier studies report modest operating cost scale economies for small institutions (those with less than about

Cash, Paper, and Electronic Payments: A Cross-Country Analysis

50 million of deposits in 1968 dollars) but are unclear where these economies might end, if at all. Unfortunately, these studies are limited in four important respects. First, those that were well specified did not measure the total cost of banking operations but concentrated on estimating scale economies for individual banking functions (e.g., demand deposits separately from commercial loans). Second, an average cost curve that could take a U shape over the full range of banks was not fitted, either because larger banks were not included or because of the functional form used (Cobb-Douglas). Consequently, the optimum or minimum cost size of a bank or office could not be determined. Third, the variables measuring the costs of branching were misspecified. Fourth, the branch

Realizing the Gains from Electronic Payments: Costs, Pricing, and Payment Choice

The social cost of a payment system comprises between 1% to 1.5% of GDP. This cost can be reduced if non-cash payments shift from paper to electronics since the cost of an electronic payment is estimated to be from one-third to one-half that of a paper-based transaction. We examine the use of cash and five non-cash payment instruments in 14 developed countries over 1987-1993. Our purpose is (1) to outline the current use of check, paper giro, electronic giro, credit card, and debit card payments and (2) to determine why some payment instruments are used more intensively than others, especially electronic versus paper-based payments. Standard demand theory influences (own price and incomes, institutional factors, and simple availability measures across countries are examined, as is the effect of habit formation. Payment substitution relationships are also estimated and indicate that checks will decline with further growth of electronic payments while the instruments that make up electronic payments will tend to expand together rather than replace one another. Copyright 1996 by Ohio State University Press.

Do consumers pay for one-stop banking? Evidence from an alternative revenue function

The growth of electronic payments can substantially reduce the social cost of a countrys payment system. We provide an estimate of the potential savings in social cost and determine the responsiveness of payment users when relative prices are used to speed up the substitution of electronic for paper-based payments. While some countries (Norway, Japan) have encouraged their banking systems to establish explicit prices to promote electronic payments, others (the United States) have not. For the first time ever, survey data are available to permit estimation of a model of payment choice from which own price, cross price, and payment substitution elasticities are derived. The data, which are semiannual panel data, concern the use of three methods for making retail payments in Norway: cash withdrawals at ATMs, writing a check, or using a debit card at the point of sale. Our finding that payment users are quite sensitive to relative prices that reflect the relatively lower cost of electronic payments is generalizable. Both production techniques and consumer needs for payment instruments are very similar across developed countries, even though instrument usage differs.