The empirical results are mutually consistent between the intermediation and production approaches and robust to other variations in specifications. The data suggest that most branches are considerably smaller than efficient scale - there are roughly twice as many branches as are needed to minimize bank cost. However, the average cost curves are relatively flat. The cost of "overbranching" is at most about 13.9% of operating costs and about 3.3% of total branching costs. Some cost scale inefficiency may be optimal from a profitability standpoint, according to the authors, since additional offices provide convenience for the bank's customers that may be recaptured by the bank on the revenue side.

The branch level X-inefficiencies dominate the scale effects, similar to the findings in bank-level research. The branching data reveal that some of the bank's branches do not perform to the level of its own best practice branch, which is a necessary condition for full efficiency. The bank may still be fully efficient relative to a conventional bank frontiers which allows for banks to be measured as efficient even if they have branches that are inefficient. The dispersion of measure X-efficiency also suggests that the quality of the local managers also is important in determining performance.

The authors believe branch inefficiencies may help explain the often-measured scale diseconomies at the bank level for large branching banks, as the additional offices attract more total customers for the bank as a whole. They also may help explain the large cost X-inefficiencies typically found at the bank level, since the total cost of producing the bank's same total output level could be reduced by having fewer branches, each producing more output.

The empirical results also suggest that it may be very difficult for banks to achieve large branch cost saving through mergers. The ability to achieve savings by closing branches that are below cost-efficient scale or are very

X-inefficient depends upon the proximity of other branches that are both relatively X-efficient and can absorb the additional output without significant scale diseconomies. The potential for improvements from superior bank management also appears to be limited by the importance of the quality of local branch mangers.

The empirical results also suggest there are substantial differences in the value of bank branches that depend on efficiency. An efficient branch may be worth more than twice as much as an inefficient branch with the same deposit base. Premium paid data confirm this implication.

The authors suggest that banks may be able to improve the efficiency of their branching networks by using efficiency measures along with their own performance measures. Relative efficiencies may be used as an incentive or monitoring device. Observation of the most efficient and least efficient offices also could help discover efficient and inefficient practices, respectively, that may be used to improve management policies and procedures.">

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Citations for "The Efficiency of Bank Branches"

by Allen Berger & John Leusner & John Mingo

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Cited by (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.):
  1. Antreas D. Athanassopoulos & Andreas Soteriou & Stavros Zenios, 1997. "Disentangling Within- and Between-Country Efficiency Differences of Bank Branches," Center for Financial Institutions Working Papers 97-17, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  2. Laurent Weill, 2008. "Convergence in Banking Efficiency Across European Countries," Working Papers of LaRGE (Laboratoire de Recherche en Gestion et Economie) 2008-07, Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur, Strasbourg (France). [Downloadable!]
  3. Evelyne Poincelot & Dominique Poincelot, 2007. "Les sociétés cotées en France préparent-elles le marché à l’augmentation de leur capital par les rachats de leurs propres actions?Do french quoted firms repurchase stocks in order to prepare t," Working Papers FARGO 1071105, Université de Bourgogne - LEG/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
  4. Allen N. Berger & Robert DeYoung, 1997. "Problem loans and cost efficiency in commercial banks," Finance and Economics Discussion Series 1997-8, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  5. Beverly Hirtle & Christopher Metli, 2004. "The evolution of U.S. bank branch networks: growth, consolidation, and strategy," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jul. [Downloadable!]
  6. Allen N. Berger & J. David Cummins & Mary A. Weiss, 1995. "The Coexistence of Multiple Distributions Systems for Financial Services: The Case of Property-Liability Insurance," Center for Financial Institutions Working Papers 95-13, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  7. Atsushi Iimi, 2003. "Efficiency in the Pakistani Banking Industry: Empirical Evidence after the Structural Reform in the Late 1990s," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 42(1), pages 41-57. [Downloadable!]
  8. 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)
  9. Barbara Casu & Claudia Girardone, 2004. "Financial conglomeration: efficiency, productivity and strategic drive," Applied Financial Economics, Taylor and Francis Journals, vol. 14(10), pages 687-696, June. [Downloadable!] (restricted)
  10. Aude Hubrecht-Deville & Hervé Leleu, 2007. "Performance measures of retail banking networks: a decision support tool," Working Papers FARGO 1071203, Université de Bourgogne - LEG/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
  11. repec:att:wimass:19199932 is not listed on IDEAS
  12. Andreas Wutz, 2000. "Einfluss der Modellierung auf die Effizienz der Bank - Produktions- und Intermediationsansatz im Vergleich," Discussion Paper Series 198, Universitaet Augsburg, Institute for Economics. [Downloadable!]
  13. 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!]
  14. Aude Hubrecht & Hervé Leleu, 2004. "Impact of Trade Area Environment on Bank’s Comparative Advantages," Working Papers FARGO 1041201, Université de Bourgogne - LEG/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
  15. 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!]
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  16. Tai-Hsin Huang & Mei-Hui Wang, 2004. "Estimation of scale and scope economies in multiproduct banking: evidence from the Fourier flexible functional form with panel data," Applied Economics, Taylor and Francis Journals, vol. 36(11), pages 1245-1253, June. [Downloadable!] (restricted)
  17. Allen N. Berger & Loretta J. Mester, 1999. "What explains the dramatic changes in cost and profit performance of the U.S. banking industry?," Working Papers 99-1, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  18. Aude Hubrecht-Deville, 2007. "Branch banking networks assessment using DEA:A benchmarking analysis," Working Papers FARGO 1071103, Université de Bourgogne - LEG/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
  19. 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!]
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  20. Beverly Hirtle, 2005. "The impact of network size on bank branch performance," Staff Reports 211, Federal Reserve Bank of New York. [Downloadable!]
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  21. Iftekhar Hasan & Ana Lozano, 1999. "Organizational Form and Expense Preference: Spanish Experience," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-068, New York University, Leonard N. Stern School of Business-. [Downloadable!]
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  22. 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!]
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  23. Ann P. Bartel, 2000. "Human Resource Management and Performance in the Service Sector: The Case of Bank Branches," NBER Working Papers 7467, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  24. James A. Berkovec & John J. Mingo & Xuechun Zhang, 1997. "Premiums in private versus public bank branch sales," Finance and Economics Discussion Series 1997-33, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  25. Ann Bartel & Richard Freeman & Casey Ichniowski & Morris Kleiner, 2004. "Can a Work Organization Have An Attitude Problem? The Impact of Workplaces on Employee Attitude and Economic Outcomes," CEP Discussion Papers dp0636, Centre for Economic Performance, LSE. [Downloadable!]
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  26. Adnan Kasman, 2002. "Cost Efficiency, Scale Economies, and Technological Progress in Turkish Banking," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 2(1), pages 1-20. [Downloadable!]
  27. Hasan, Iftekhar & Marton, Katherin, 2000. "Development and Efficiency of the Banking Sector in a Transitional Economy: Hungarian Experience," BOFIT Discussion Papers 7/2000, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  28. Guohua Feng & Apostolos Serletis, 2007. "Efficiency and Productivity of the US Banking Industry, 1998-2005: Evidence from the Fourier Cost Function Satisfying Global Reg," Working Papers 2007-13, Department of Economics, University of Calgary, revised 11 Dec 2007. [Downloadable!]
  29. Allen N. Berger, 2000. "The integration of the financial services industry: where are the efficiencies?," Finance and Economics Discussion Series 2000-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  30. Kristiaan Kerstens & Philippe Vanden Eeckaut, 1999. "A new criterion for technical efficiency measures: non-monotonicity across dimensions axioms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(1), pages 45-59.
  31. 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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