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Profit efficiency of U.S. commercial banks: a decomposition

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  • Diego A. Restrepo-Tobón

    ()

  • Subal C. Kumbhakar

    ()

Abstract

This paper presents new evidence regarding the relation between profit, revenue, and cost efficiencies of U.S. commercial banks. Building on the widely used nonstandard profit function (NSPF) approach, we show (i) why estimation of NSPF would be wrong and (ii) how revenue and cost efficiencies contribute to profit efficiency. Using data from U.S. comercial banks from 2001 to 2010, we find that losses due to profit inefficiency represents about 8.2% of banks’ equity of which 3.5% is due to revenue inefficiency and 4.7% to cost inefficiency. Cost efficiency weighs more than revenue efficiency in estimated profit efficiency. However, compared with cost inefficiency, revenue inefficiency affects more overall profitability.

Suggested Citation

  • Diego A. Restrepo-Tobón & Subal C. Kumbhakar, 2013. "Profit efficiency of U.S. commercial banks: a decomposition," DOCUMENTOS DE TRABAJO CIEF 010939, UNIVERSIDAD EAFIT.
  • Handle: RePEc:col:000122:010939
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    Citations

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    Cited by:

    1. Diego Restrepo-Tobón & Subal Kumbhakar & Kai Sun, 2015. "Obelix vs. Asterix: Size of US commercial banks and its regulatory challenge," Journal of Regulatory Economics, Springer, vol. 48(2), pages 125-168, October.
    2. repec:eee:soceps:v:62:y:2018:i:c:p:104-120 is not listed on IDEAS
    3. Barra, Cristian & Zotti, Roberto, 2017. "On the relationship between bank market concentration and stability of financial institutions: Evidence from the Italian banking sector," MPRA Paper 79900, University Library of Munich, Germany.
    4. BARRA, Cristian & ZOTTI, Roberto, 2017. "Bank Performance, Financial Stability and Market Competition: do Cooperative and Non-Cooperative Banks Behave Differently?," CELPE Discussion Papers 143, CELPE - Centre of Labour Economics and Economic Policy, University of Salerno, Italy.

    More about this item

    Keywords

    Pro?t Ef?ciency; Revenue ef?ciency; Cost ef?ciency; Nonstandard Pro?t Function; Stochastic Frontier;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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