An Analysis of the Relevance of Obs Items in Explaining Productivity Change in European Banking
25 Pages Posted: 28 May 2004
The 1990s have witnessed a significant growth in bank income generated through non-traditional activities especially for large EU universal institutions. Using the non-parametric Malmquist methodology this paper analyses the importance of the inclusion of off-balance sheet (OBS) business in the definition of banks output when estimating total factor productivity change indexes. The analysis is then extended to the decomposition of total factor productivity change into technical efficiency and technological change. The results reinforce the prevalent view in the recent literature, indicating that the exclusion of non-traditional activities leads to a misspecification of banks output. In particular, the inclusion of OBS items results in an increase in estimated productivity levels for all countries under study. However, the impact seems to be the biggest on technological change rather than efficiency change. Overall, results suggest that despite the uneven distribution of OBS between countries and among different institutions in the same country, these non-traditional activities are increasingly important and failure to account for them would lead to biased conclusions.
Keywords: Finance and Banking, Productivity Change, Malmquist Index, DEA
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