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Efficiency and economies of scale of large Canadian banks

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  • Jason Allen
  • Ying Liu

Abstract

. This paper measures the economies of scale of Canada's six largest banks and their cost‐efficiency over time. Using a unique panel data set from 1983 to 2003, we estimate pooled cost functions and derive measures of relative efficiency and economies of scale. The disaggregation of the data allows us to include non‐traditional outputs as well as time‐varying, bank‐specific effects. Our model leads us to reject constant returns to scale. These findings suggest there are potential scale benefits in the Canadian banking industry. We also find that technological and regulatory changes have had significant positive effects on the banks' cost structure. Ce texte mesure les économies d'échelle des six plus grandes banques canadiennes et le degré d'efficacité de leurs coûts dans le temps. A partir d'une base de données unique, on calibre des fonctions de coûts et on dérive des mesures d'efficacité relative et d'économies d'échelle. La désagrégation des données permet de tenir compte d'extrants non conventionnels ainsi que d'effets spécifiques à certaines banques qui peuvent changer dans le temps. Le modèle tend à rejeter l'hypothèse de rendements constants à l'échelle. Les résultats suggèrent que des avantages potentiels à l'échelle existent dans l'industrie bancaire canadienne. On montre aussi que les changements dans la technologie et la réglementation ont eu des effets positifs significatifs sur la structure de coûts des banques.

Suggested Citation

  • Jason Allen & Ying Liu, 2007. "Efficiency and economies of scale of large Canadian banks," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(1), pages 225-244, February.
    • Handle: RePEc:wly:canjec:v:40:y:2007:i:1:p:225-244
    DOI: 10.1111/j.1365-2966.2007.00406.x
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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