Stephen G. Timme

The efficiency of financial institutions: A review and preview of research past, present and future☆

Abstract This introductory article reviews past research on the topic of financial institution efficiency, surveys the contributions in this special issue, and suggests how future research on this important topic might proceed.

Corporate control and bank efficiency

Abstract When the CEO is also chairman of the board, principal-agent conflicts may be exacerbated because of the consolidation of the decision management and the decision control processes. Our results suggest that cost efficiency and return on assets are (1) lower for Chairman-CEO banks, (2) positively (negatively or not) related to Nonchairman-CEO (Chairman-CEO) ownership, and (3) unrelated to institutional and large blockholders ownership, and the proportion of inside (outside) directors. These results suggest top management team structure affects performance and internal monitoring devices may not be as effective as envisioned in the literature.

Technical Change, Organizational Form, and the Structure of Bank Production

OF THOSE TECHNOLOGICAL CHARACTERISTICS RELATED TO the nature of competition among firms in an industry or market, scale economies and technical change are especially important. Economies of scale are said to exist when an equiproportional increase in all inputs results in a greater than proportional increase in output or equivalently when an increase in output at constant input prices leads to a less than proportional increase in total costs. Thus, average costs decline as output expands. Depending upon the extent to which costs decline as output increases, regulation of the firms in the industry may be necessary.l The literature analyzing scale economies in commercial banking is voluminous. The early studies on scale economies in banking include those by Benston (1965, 1972), Greenbaum (1967), Murphy (1972), and Bell and Murphy (1968). More recent studies include those by Benston, Hanweck, and Humphrey (1982) and Clark (1984).2 This literature has established that mild scale economies exist in bank

Core deposits and physical capital: a reexamination of bank scale economies and efficiency with quasi-fixed inputs

This paper compares measures of bank production efficiency assuming all bank inputs are completely variable with measures obtained from specifications which take account of the quasi-fixed nature of core deposits and bank physical capital, and the treatment of certain deposits as outputs. The empirical results imply that scale economy measures vary substantially for small to medium-sized banks whereas those for the largest banks are fairly robust to the different specifications. Estimates of economies of scope were found to be invariant to different input/output specifications, whereas efficiency measures varied significantly with changes in the specification of the cost function and with the definition of outputs and inputs. Copyright 1995 by Ohio State University Press.

Technological change in large U.S. commercial banks

This article examines technological change, its relationship to firm size, and its impact on the efficient scale of output and product mix for large U.S. commercial banks. The results suggest that technological change lowered real costs by about one percent per year, increased the cost-minimizing scale of outputs, and affected product mix. The authors do not find support for the Galbraith-Schumpeter hypothesis. This suggests that the largest banks cannot use innovation alone to outpace smaller banks. The major implications are that public policies allowing freer banking combinations do not necessarily run counter to the public interest. Copyright 1991 by University of Chicago Press.

International comparison of bank production characteristics and technological change

In this paper, we conduct an international comparison of bank production and technological characteristics. The comparison is performed using novel evidence on changes in labour demand over the period 1980–89 for banks headquartered in Canada, France, West Germany, Italy, Japan and the United States. The results suggest that there is relatively low substitutability of labour for capital in the production process of these banking organizations. Significant scale economies were found with regards to the expansion of output and the concomitant increase in labour. In addition, technological change operated to lower the quantity of inputs needed to produce a given level of outputs and increased the minimum efficient-size bank over the sample period. Many of the production characteristics and technology effects varied significantly across countries. These findings imply that intercountry differences in production characteristics and technological change should be explicitly recognized in bank strategic planning...