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Are Canadian Banks Efficient? A Canada--U.S. Comparison

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  • Jason Allen
  • Walter Engert
  • Ying Liu

Abstract

The authors compare the efficiency of Canada's largest banks with U.S. commercial banks over the past 20 years. Efficiency is measured in three ways. First, the authors study key performance ratios, and find that Canadian banks are as productive as U.S. banks. Second, they investigate whether there are economies of scale in the production functions of Canadian banks and broadly comparable U.S. bank-holding companies (BHCs). They find larger economies of scale for Canadian banks than for the U.S. BHCs, which suggests that Canadian banks are less efficient in terms of scale, and have more to gain in terms of efficiency benefits from becoming larger. Third, the authors measure cost-inefficiency in Canadian banks and in U.S. BHCs relative to the domestic efficient frontier in each country (the domestic best-practice institution). They find that Canadian banks are closer to the domestic efficient frontier than are the U.S. BHCs. Canadian banks have also moved closer to the domestic efficient frontier than have the U.S. BHCs over time. Finally, the authors examine the dispersion in cost-inefficiency found in Canadian banks and attribute some of the dispersion to differences in information and communication technology investment. Comparisons are made with the U.S. BHC experience.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 06-33.

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Length: 44 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bca:bocawp:06-33

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Keywords: Financial institutions;

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References

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  1. Allen N. Berger & Loretta J. Mester, 2001. "Explaining the Dramatic Changes in Performance of U.S. Banks: Technological Change, Deregulation and Dynamic Changes in Competition," Center for Financial Institutions Working Papers 01-22, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Jason Allen & Ying Liu, 2005. "Efficiency and Economies of Scale of Large Canadian Banks," Working Papers 05-13, Bank of Canada.
  3. Humphrey, David & Willesson, Magnus & Bergendahl, Goran & Lindblom, Ted, 2006. "Benefits from a changing payment technology in European banking," Journal of Banking & Finance, Elsevier, vol. 30(6), pages 1631-1652, June.
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  5. Fabio Panetta & Fabiano Schivardi & Matthew Shum, 2004. "Do mergers improve information? Evidence from the loan market," Temi di discussione (Economic working papers) 521, Bank of Italy, Economic Research and International Relations Area.
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  7. 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.
  8. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of financial institutions: international survey and directions for future research," Finance and Economics Discussion Series 1997-11, Board of Governors of the Federal Reserve System (U.S.).
  9. 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.
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  13. Danny Leung, 2004. "The Effect of Adjustment Costs and Organizational Change on Productivity in Canada: Evidence from Aggregate Data," International Productivity Monitor, Centre for the Study of Living Standards, vol. 9, pages 52-61, Fall.
  14. Veronika Dolar & Césaire Meh, 2002. "Financial Structure and Economic Growth: A Non-Technical Survey," Working Papers 02-24, Bank of Canada.
  15. Milne , Alistair, 2005. "What's in it for us? Network effects and bank payment innovation," Research Discussion Papers 16/2005, Bank of Finland.
  16. Joanna Stavins, 2000. "ATM fees: does bank size matter?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 13-24.
  17. Loretta J. Mester, 1996. "Measuring efficiency at U.S. banks: accounting for heterogeneity is important," Working Papers 96-11, Federal Reserve Bank of Philadelphia.
  18. 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.
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Citations

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Cited by:
  1. Richard Dion & Robert Fay, 2008. "Understanding Productivity: A Review of Recent Technical Research," Discussion Papers 08-3, Bank of Canada.
  2. Hossein Karimi Hosnijeh & Robabeh Jaberi, 2009. "The Impacts of Technical Changes on Banking Economic Indices, Case Study of Iran," Iranian Economic Review, Economics faculty of Tehran university, vol. 14(2), pages 97-111, fall.
  3. Miguel SARMIENTOÕ & Andrés CEPEDA & Hernando MUTIS & Juan F. PÉREZ, 2013. "Nueva Evidencia sobre la Eficiencia de la Banca," ARCHIVOS DE ECONOMÍA 010705, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
  4. Dong Xiang & Abul Shamsuddin & Andrew C Worthington, 2011. "A comparative technical, cost and profit efficiency analysis of Australian, Canadian and UK banks: Feasible efficiency improvements in the context of controllable and uncontrollable factors," Discussion Papers in Finance finance:201119, Griffith University, Department of Accounting, Finance and Economics.

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