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

Berger, Allen N.; Mester, Loretta J.

doi:10.2139/ssrn.138159

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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

Loretta J. Mester

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: 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