Evaluating the Efficiency of Commercial Banks: Does Our View of What Banks Do Matter?

En the past 15 years, the banking industry has faced growing competition from other lii financial service firms and financial markers and, at the same time, has undergone subsnannial deregulation and change. Proponents of further deregulation, such as the removal of barriers no nhe commingling of commercial and investment banking, argue that such changes would enhance the eff’mciency and viability of American banks. The impact of competitive and regulatory changes on banks can be judged by gross measures of performance, such as profitability and failure rates. Economisns are also interested in how such changes affect the efficiency with which banks transform resources into various financial services. Inefficiency implies that resources are wasned, that is, that firms are producing less than the feasible level of output from the resources employed, or are using relatively costly combinations of resources no produce a particular mix of products or services, Thus, a goal of policymakers, as well as stockholders and managers, is to devise policies than improve the efficiency of commercial banks. linforrunately, economists do not agree upon the appropriate methodology for measuring the efficiency of banks, Several estimation techniques have been proposed, each with advantages and disadvantages. The problem is complicated by the myriad of different services that commercial banks perform. Researchers deal winh complex issues in measuring bank production: Is a deposit an input no the production process, or an output? Should outputs he measured in terms of the number of a bank’s accounts, the number of transactions it processes or the dollar amounts of Its loans or deposits? Perhaps non surprisingly estimates of commercial bank inefficiency vary considerably across studies that use different techniques, conceptions of bank production and data samples. This article investigates the sensitivity of efficiency measures no broadly different conceptions of how banks operate. We use a single-esnimanion technique and a common pooi of banks to compare efficiency measures based on alnernanive views of bank production. We find substantial differences in mean efficiency across models and low, though statistically significant, correspondence in the rankings of banks by efficiency scores across models. First, we discuss why measuring commercial bank efficiency is useful, some alternative measures of efficiency and techniques for estimating efficiency A description of the approach we take, our data and our results follow.