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Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?

  • Allen N. Berger
  • Loretta J. Mester

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% 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 concept, measurement method, and a number of bank, market, and regulatory characteristics. We review the existing literature and provide new evidence using data on U.S. banks over the period 1990-95.

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File URL: http://fic.wharton.upenn.edu/fic/papers/97/9704.pdf
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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 97-04.

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Date of creation: Jan 1997
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Handle: RePEc:wop:pennin:97-04
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