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

Board of Governors of the Federal Reserve System Working Paper No. 1997-10

59 Pages Posted: 29 Nov 1998

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland; University of Pennsylvania - The Wharton School

Abstract

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 huge, 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.

JEL Classification: G2, D2, G21, G28, E58, E61, F33

Suggested Citation

Berger, Allen N. and Mester, Loretta J., Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?. Board of Governors of the Federal Reserve System Working Paper No. 1997-10. Available at SSRN: https://ssrn.com/abstract=138159 or http://dx.doi.org/10.2139/ssrn.138159

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

University of Pennsylvania - The Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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