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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.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 40 (2007)
Issue (Month): 1 (February)
Pages: 225-244

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Handle: RePEc:cje:issued:v:40:y:2007:i:1:p:225-244

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  1. Shaffer, Sherrill, 1993. "A Test of Competition in Canadian Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 49-61, February.
  2. Berger, Allen N. & Humphrey, David B., 1997. "Efficiency of financial institutions: International survey and directions for future research," European Journal of Operational Research, Elsevier, vol. 98(2), pages 175-212, April.
  3. Murray, John D & White, Robert W, 1983. " Economies of Scale and Economies of Scope in Multiproduct Financial Institutions: A Study of British Columbia Credit Unions," Journal of Finance, American Finance Association, vol. 38(3), pages 887-902, June.
  4. Allen N. Berger & Loretta J. Mester, 1999. "What Explains the Dramatic Changes in Cost and Profit Performance of the U.S. Banking Industry?," Center for Financial Institutions Working Papers 99-10, Wharton School Center for Financial Institutions, University of Pennsylvania.
  5. John H. Boyd & Mark Gertler, 1995. "Are Banks Dead? Or Are the Reports Greatly Exaggerated?," NBER Working Papers 5045, National Bureau of Economic Research, Inc.
  6. Clark, Jeffrey A & Siems, Thomas F, 2002. "X-Efficiency in Banking: Looking beyond the Balance Sheet," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(4), pages 987-1013, November.
  7. Rime, Bertrand & Stiroh, Kevin J., 2003. "The performance of universal banks: Evidence from Switzerland," Journal of Banking & Finance, Elsevier, vol. 27(11), pages 2121-2150, November.
  8. Christian Calmès, 2004. "Regulatory Changes and Financial Structure: The Case of Canada," Working Papers 04-26, Bank of Canada.
  9. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
  10. Schmidt, Peter & Knox Lovell, C. A., 1979. "Estimating technical and allocative inefficiency relative to stochastic production and cost frontiers," Journal of Econometrics, Elsevier, vol. 9(3), pages 343-366, February.
  11. Rogers, Kevin E., 1998. "Nontraditional activities and the efficiency of US commercial banks," Journal of Banking & Finance, Elsevier, vol. 22(4), pages 467-482, May.
  12. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  13. Cornwell, Christopher & Schmidt, Peter & Sickles, Robin C., 1990. "Production frontiers with cross-sectional and time-series variation in efficiency levels," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 185-200.
  14. James McIntosh, 2002. "A welfare analysis of Canadian chartered bank mergers," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 457-475, August.
  15. Freedman, C. & Goodlet, C., 1998. "The Financial Services Sector: Past Changes and Future Prospects," Technical Reports 82, Bank of Canada.
  16. Ferrier, Gary D. & Lovell, C. A. Knox, 1990. "Measuring cost efficiency in banking : Econometric and linear programming evidence," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 229-245.
  17. Lawrence, Colin, 1989. "Banking Costs, Generalized Functional Forms, and Estimation of Economies of Scale and Scope," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 368-79, August.
  18. Mitchell, Karlyn & Onvural, Nur M, 1996. "Economies of Scale and Scope at Large Commercial Banks: Evidence from the Fourier Flexible Functional Form," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 178-99, May.
  19. Rezvanian, Rasoul & Mehdian, Seyed, 2002. "An examination of cost structure and production performance of commercial banks in Singapore," Journal of Banking & Finance, Elsevier, vol. 26(1), pages 79-98, January.
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Citations

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Cited by:
  1. Guidara, Alaa & Lai, Van Son & Soumaré, Issouf & Tchana, Fulbert Tchana, 2013. "Banks’ capital buffer, risk and performance in the Canadian banking system: Impact of business cycles and regulatory changes," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3373-3387.
  2. Diego A. Restrepo-Tobón & Subal C. Kumbhakar & Kai Sun, 2013. "Are U.S. Commercial Banks Too Big?," DOCUMENTOS DE TRABAJO CIEF 010943, UNIVERSIDAD EAFIT.
  3. Dressler, Scott, 2008. "Economies of scale in banking, indeterminacy, and monetary policy," MPRA Paper 8370, University Library of Munich, Germany.
  4. Mario Fortin & Andre Leclerc, 2009. "Économies d’échelle et de gamme dans les coopératives de services financiers : une approche non paramétrique (DEA)," Cahiers de recherche 09-08, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  5. David Dodge, 2011. "Public Policy for the Canadian Financial System: From Porter to the Present and Beyond," New Directions for Intelligent Government in Canada: Papers in Honour of Ian Stewart, in: Fred Gorbet & Andrew Sharpe (ed.), New Directions for Intelligent Government in Canada: Papers in Honour of Ian Stewart, pages 81-100 Centre for the Study of Living Standards.
  6. Walid Hejazi & Eric Santor, 2005. "Degree of Internationalization and Performance: An Analysis of Canadian Banks," Working Papers 05-32, Bank of Canada.
  7. Michalak, Tobias C. & Uhde, André, 2012. "Credit risk securitization and bank soundness in Europe," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 272-285.
  8. Christian Calmès & Raymond Théoret, 2013. "Is the Canadian banking system really “stronger” than the U.S. one?," RePAd Working Paper Series UQO-DSA-wp022013, Département des sciences administratives, UQO.
  9. Scott J. Dressler & Erasmus K. Kersting, 2012. "Economies of Scale in Banking, Confidence Shocks, and Business Cycles," Villanova School of Business Department of Economics and Statistics Working Paper Series 18, Villanova School of Business Department of Economics and Statistics.
  10. Thorsten V. Koeppl & James MacGee, 2007. "Branching Out: The Urgent Need to Transform Canada’s Financial Landscape and How to Do It," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 251, June.
  11. Ferro, Gustavo & León, Sonia M. & Romero, Carlos A. & Wilson, Damián, 2014. ""Reseteo" de un sistema financiero tras una crisis: un análisis de eficiencia
    [Resetting a financial system after a crisis: an efficiency analysis]
    ," MPRA Paper 54437, University Library of Munich, Germany.
  12. Christian Calm¨¨s & Raymond Th¨¦oret, 2013. "Is the Canadian Banking System Really ¡°Stronger¡± than the U.S. One?," Review of Economics & Finance, Better Advances Press, Canada, vol. 3, pages 1-18, November.
  13. Jason Allen & Walter Engert & Ying Liu, 2006. "Are Canadian Banks Efficient? A Canada--U.S. Comparison," Working Papers 06-33, Bank of Canada.

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