Bank Productivity and Performance Groups: A Decomposition Approach Based Upon the Luenberger Productivity Indicator

Abstract

The purpose of this paper is twofold. First, in the framework of the strategic groups’ literature, it analyzes changes in productivity and efficiency of Spanish private and savings banks over an eight-year period (1998-2006). Second, by adapting the decomposition of the Malmquist productivity indices suggested by Färe et al. (1994), it proposes similar components decomposing the Luenberger productivity indicator. Initially, productivity is decomposed into technological and efficiency changes. Thereafter, this efficiency change is decomposed into pure efficiency, scale and congestion changes. Empirical results demonstrate that productivity improvements are partially due to technological innovation. Furthermore, it is shown how the competition between private and savings banks develops in terms of the analyzed productivity and efficiency components. While private banks enjoy better efficiency change, savings banks contribute more to technological progress. Consequently, the Luenberger components are used as cluster analysis inputs. Thus, economic interpretations of the resulting performance groups are made via key differences in productivity components. Finally, following the strategic groups’ literature, supplementary insights are gained by linking these performance groups with banking ratios.

Keywords: Luenberger decomposition, Productivity, Efficiency, Spanish banking sector, Performance groups, Banking ratios