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The Performance of Universal Banks: Evidence from Switzerland

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This paper examines the production structure of Swiss banks in the period 1996-99. Using a variety of output specifications, we find evidence of large relative inefficiencies across Swiss banks. The results show the importance of accounting for the broad range of activities that universal banks undertake, e.g., failure to account for off-balance sheet items, trading, and brokerage and portfolio management activities leads profit efficiency to be dramatically understated. We find evidence of economies of scale for small and mid-size banks, but little evidence that significant scale economies remain for the very largest banks. Finally, evidence on scope economies is weak for the largest banks that are involved in a wide variety of activities. These results suggest few obvious benefits from the trend toward larger universal banks.

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Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 01.03.

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Length: 35 pages
Date of creation: May 2001
Date of revision:
Handle: RePEc:szg:worpap:0103

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  1. John H. Boyd & Stanley L. Graham, 1986. "Risk, regulation, and bank holding company expansion into nonbanking," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-17.
  2. Jacob A. Bikker, 2001. "Efficiency in the European banking industry: an exploratory analysis to rank contries," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, ULB -- Universite Libre de Bruxelles, vol. 17.
  3. 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.
  4. Cara S. Lown & Carol L. Osler & Philip E. Strahan & Amir Sufi, 2000. "The changing landscape of the financial services industry: what lies ahead?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Oct, pages 39-54.
  5. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of Financial Institutions: International Survey and Directions for Future Research," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 97-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. Berger, Allen N. & Hanweck, Gerald A. & Humphrey, David B., 1987. "Competitive viability in banking : Scale, scope, and product mix economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(3), pages 501-520, December.
  7. John H. Boyd & Stanley L. Graham, 1988. "The profitability and risk effects of allowing bank holding companies to merge with other financial firms: a simulation study," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-20.
  8. Joseph P. Hughes & Loretta J. Mester, 1997. "Bank capitalization and cost: evidence of scale economies in risk management and signaling," Working Papers 96-2, Federal Reserve Bank of Philadelphia.
  9. Panzar, John C & Rosse, James N, 1987. "Testing for "Monopoly" Equilibrium," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 35(4), pages 443-56, June.
  10. Cybo-Ottone, Alberto & Murgia, Maurizio, 2000. "Mergers and shareholder wealth in European banking," Journal of Banking & Finance, Elsevier, Elsevier, vol. 24(6), pages 831-859, June.
  11. Werner Hermann & Martin Maurer, 1991. "Kostenvorteile im schweizerischen Universalbankensystem," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), Swiss Society of Economics and Statistics (SSES), vol. 127(III), pages 563-578, September.
  12. 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, Blackwell Publishing, vol. 28(2), pages 178-99, May.
  13. Rogers, Kevin E., 1998. "Nontraditional activities and the efficiency of US commercial banks," Journal of Banking & Finance, Elsevier, Elsevier, vol. 22(4), pages 467-482, May.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Are Big Banks Better?
    by James Kwak in the baseline scenario on 2009-10-26 14:28:16
  2. Guest Post: Big Banks Are NOT More Efficient
    by George Washington in Naked capitalism on 2009-10-27 19:07:41
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