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What makes a bank efficient? : a look at financial characteristics and management and ownership structure

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Author Info
Kenneth Spong
Richard J. Sullivan
Robert DeYoung

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Abstract

Increased competition, new technology, and bank consolidation are reinforcing the need for banks to operate efficiently. Moreover, recent research on banking efficiency shows that there is much room for reducing expenses and making better use of bank resources. This article compares the financial characteristics, as well as the management and ownership structure, of a sample of efficient and inefficient banks from the Tenth Federal Reserve District. The comparison reveals a number of factors that contribute to bank efficiency. ; Efficient banks control all aspects of costs, yet deliver bank services that are often more resource intensive than the services provided by less efficient banks. Stockholders at efficient banks are actively involved, play a major policymaking role, or make other contributions through the board of directors. A bank is more likely to be efficient if its manager either has a strong financial stake in the bank, or is closely monitored by stockholders and given appropriate incentives. The data further suggest that efficient banks are not achieving their efficiency by expending fewer resources on credit analysis and other forms of risk control. In sum, efficient bank operations can be obtained under a variety of circumstances, but two essential keys to success are properly motivated managers and active participation by bank owners.

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File URL: http://www.kansascityfed.org/PUBLICAT/FIP/prs95-1.pdf
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Publisher Info
Article provided by Federal Reserve Bank of Kansas City in its journal Financial Industry Perspectives.

Volume (Year): (1995)
Issue (Month): Dec ()
Pages: 1-19
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Handle: RePEc:fip:fedkfi:y:1995:i:dec:p:1-19

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Related research
Keywords: Banking structure ; Bank management;

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  1. Robert DeYoung & Kenneth Spong & Richard J. Sullivan, 1999. "Who's minding the store? motivating and monitoring hired managers at small, closely held firms: the case of commercial banks," Working Paper Series WP-99-17, Federal Reserve Bank of Chicago. [Downloadable!]
  2. Allen N. Berger & Loretta J. Mester, 1997. "Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?," Center for Financial Institutions Working Papers 97-04, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
  3. Allen N. Berger & Robert De Young, 2001. "The effects of geographic expansion on bank efficiency," Finance and Economics Discussion Series 2001-03, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  4. Claudia Girardone & Philip Molyneux & Edward P. M. Gardener, 2004. "Analysing the determinants of bank efficiency: the case of Italian banks," Applied Economics, Taylor and Francis Journals, vol. 36(3), pages 215-227, February. [Downloadable!] (restricted)
  5. Allen N. Berger & Robert DeYoung, 2002. "Technological progress and the geographic expansion of the banking industry," Finance and Economics Discussion Series 2002-31, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  6. Jonathan Hao & William C. Hunter & Won Keun Yang, 1999. "Deregulation and efficiency: the case of private Korean banks," Working Paper Series WP-99-27, Federal Reserve Bank of Chicago. [Downloadable!]
  7. Paul W. Bauer & Allen N. Berger & Gary D. Ferrier & David B. Humphrey, 1997. "Consistency conditions for regulatory analysis of financial institutions: a comparison of frontier efficiency methods," Finance and Economics Discussion Series 1997-50, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  8. S. Carbo & E. P. M. Gardener & J. Williams, 2003. "A note on technical change in banking: the case of European savings banks," Applied Economics, Taylor and Francis Journals, vol. 35(6), pages 705-719, January. [Downloadable!] (restricted)
  9. Eva Gutierrez, 2008. "The Reform of Italian Cooperative Banks: Discussion of Proposals," IMF Working Papers 08/74, International Monetary Fund. [Downloadable!]
  10. Paul W. Bauer & Allen N. Berger & Gary D. Ferrier & David B. Humphrey, 1997. "Consistency conditions for regulatory analysis of financial institutions: a comparison of frontier efficiency methods," Financial Services working paper 97-02, Federal Reserve Bank of Cleveland. [Downloadable!]
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