Explaining the dramatic changes in performance of U.S. banks: technological change, deregulation, and dynamic changes in competition.

The authors investigate the effects of technological change, deregulation, and dynamic changes in competition on the performance of U.S. banks. The authors' most striking result is that during 1991-1997, cost productivity worsened while profit productivity improved substantially, particularly for banks engaging in mergers. The data are consistent with the hypothesis that banks tried to maximize profits by raising revenues as well as reducing costs. Banks appeared to provide additional or higher quality services that raised costs but also raised revenues by more than the cost increases. The results suggest that methods that exclude revenues when assessing performance may be misleadingBanks and banking ; Bank mergers

What explains the dramatic changes in cost and profit performance of the U.S. banking industry?

The authors investigate the sources of recent changes in the performance of U.S. banks using concepts and techniques borrowed from the cross-section efficiency literature. Their most striking result is that during 1991-1997, cost productivity worsened while profit productivity improved substantially, particularly for banks engaging in mergers. The data are consistent with the hypothesis that banks tried to maximize profits by raising revenues as well as reducing costs, and that banks provided additional services or higher service quality that raised costs but also raised revenues by more than the cost increases. The results suggest that methods that exclude revenues may be misleading.Banks and banking - Costs ; Banks and banking

Efficiency and productivity change in the U.S. commercial banking industry: a comparison of the 1980s and 1990s

The authors investigate efficiency and productivity growth of the U.S. banking industry over the latter part of the 1980s and first part of the 1990s using comprehensive data on U.S. commercial banks. Cost efficiency decreased slightly between the 1980s and 1990s, and large banks showed a sizable decline in profit efficiency. Total predicted production costs increased over both the 1980s and 1990s, reflecting cost productivity declines. Changes in business conditions led to cost declines over both periods. Total predicted profits increased in the 1980s and 1990s, with the entire change reflecting increased profit productivity. Changing business conditions led to small declines in profits.Banks and banking ; Productivity

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

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 percent 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 concepts, measurement method, and a number of bank, market, and regulatory characteristics. We review the existing literature and provide new evidency using data on U.S. banks over the period 1990-5.Banks and banking - Costs ; Financial institutions

Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?

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 U.S. banks over the period 1990-95.Bank, efficiency, cost, profit

What Explains the Dramatic Changes in Cost and Profit Performance of the U.S. Banking Industry?

We investigate the sources of recent changes in the performance of U.S. banks using concepts and techniques borrowed from the cross-section efficiency literature. Our most striking result is that during 1991-1997, cost productivity worsened while profit productivity improved substantially, particularly for banks engaging in mergers. The data are consistent with the hypothesis that banks tried to maximize profits by raising revenues as well as reducing costs, and that banks provided additional services or higher service quality that raised costs but also raised revenues by more than the cost increases. The results suggest that methods that exclude revenues may be misleading.Bank, productivity, efficiency, cost, profit

Evolution: Complexity, uncertainty and innovation

Complexity science provides a general mathematical basis for evolutionary thinking. It makes us face the inherent, irreducible nature of uncertainty and the limits to knowledge and prediction. Complex, evolutionary systems work on the basis of on-going, continuous internal processes of exploration, experimentation and innovation at their underlying levels. This is acted upon by the level above, leading to a selection process on the lower levels and a probing of the stability of the level above. This could either be an organizational level above, or the potential market place. Models aimed at predicting system behaviour therefore consist of assumptions of constraints on the micro-level – and because of inertia or conformity may be approximately true for some unspecified time. However, systems without strong mechanisms of repression and conformity will evolve, innovate and change, creating new emergent structures, capabilities and characteristics. Systems with no individual freedom at their lower levels will have predictable behaviour in the short term – but will not survive in the long term. Creative, innovative, evolving systems, on the other hand, will more probably survive over longer times, but will not have predictable characteristics or behaviour. These minimal mechanisms are all that are required to explain (though not predict) the co-evolutionary processes occurring in markets, organizations, and indeed in emergent, evolutionary communities of practice. Some examples will be presented briefly