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Inside the black box: what explains differences in the efficiencies of financial institutions?

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  • Allen N. Berger
  • Loretta J. Mester

Abstract

Over the past several years, substantial research effort has gone into measuring the efficiency of financial institutions. Many studies have found that inefficiencies are quite large, on the order of 20 percent or more of total banking industry costs and about half of the industry's potential profits. There is no consensus on the sources of the differences in measured efficiency. This paper examines several possible sources, including differences in efficiency concepts, measurement method, and a number of bank, market, and regulatory characteristics. We review the existing literature and provide new evidency using data on U.S. banks over the period 1990-5.

Suggested Citation

  • Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Working Papers 97-1, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:97-1
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    More about this item

    Keywords

    Banks and banking - Costs; Financial institutions;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • D2 - Microeconomics - - Production and Organizations
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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