The efficiency of bank branches

Most of the early studies of bank efficiency focused on scale and product mix efficiency, or how close banks are to producing at the scale or product mix that minimizes costs per unit of output. Despite these past efforts, something rather important is missing from most of the analysis according to the authors - evaluation of bank branch efficiency. There has been very little empirical research on bank branch efficiency because branching data generally are confidential and not required by regulators. This paper tries to add to the limited information available about bank branch efficiency. It specifies the Fourier-Flexible nonparametric form for the cost function to characterize the efficient frontier for bank branches, the first application of the form in a frontier efficiency context. This form is applied to over 760 branches of a large U.S. commercial bank for three years of 1989, 1990, and 1991. The authors specify and compare models that employ two different concepts of bank costs and output - the intermediation approach and the production approach. The data set includes information on several types of transactions, allowing for more accurate efficiency estimation. The authors also have information on interbranch transactions, which allows them to account for the services that one branch provides for the customers of another branch. The study is a first of its kind from many perspectives in its methodological approaches, its conceptual approaches that compare and contrast the "intermediation" and "production" approaches to defining branch output, linking the relationship between branch efficiencies and bank efficiencies, the problems associated with bank mergers, and the effects of branch efficiency on price or branch offices to be sold. 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 small(This abstract was borrowed from another version of this item.)